The Market Doesn't Like What It Sees From NHK Spring Co., Ltd.'s (TSE:5991) Earnings Yet As Shares Tumble 26%

NHK Spring Co., Ltd. (TSE:5991) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The last month has meant the stock is now only up 7.3% during the last year.

Although its price has dipped substantially, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider NHK Spring as an attractive investment with its 6.6x 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.

Recent times have been advantageous for NHK Spring as its earnings have been rising faster 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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.

Is There Any Growth For NHK Spring?

There's an inherent assumption that a company should underperform the market for P/E ratios like NHK Spring's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 83% last year. Pleasingly, EPS has also lifted 351% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 3.8% per year as estimated by the three analysts watching the company. With the market predicted to deliver 9.6% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that NHK Spring's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

NHK Spring's P/E has taken a tumble along with its share price. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of NHK Spring's analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for NHK Spring (1 is a bit unpleasant!) that we have uncovered.

Of course, you might also be able to find a better stock than NHK Spring. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com