NHK Spring Co., Ltd.'s (TSE:5991) Business And Shares Still Trailing The Market

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may consider NHK Spring Co., Ltd. (TSE:5991) as an attractive investment with its 6.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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NHK Spring certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for NHK Spring

Want the full picture on analyst estimates for the company? Then our free report on NHK Spring will help you uncover what's on the horizon.

How Is NHK Spring's Growth Trending?

NHK Spring's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 166%. The strong recent performance means it was also able to grow EPS by 131% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 7.1% as estimated by the five analysts watching the company. With the market predicted to deliver 9.7% growth , that's a disappointing outcome.

In light of this, it's understandable that NHK Spring's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of NHK Spring's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for NHK Spring you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.