Nippon Seiki Co., Ltd. (TSE:7287) Stock's 32% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Nippon Seiki Co., Ltd. (TSE:7287) share price has fared very poorly over the last month, falling by a substantial 32%. The last month has meant the stock is now only up 4.4% during the last year.

Even after such a large drop in price, it's still not a stretch to say that Nippon Seiki's price-to-earnings (or "P/E") ratio of 11.4x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Nippon Seiki as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Nippon Seiki

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nippon Seiki.

How Is Nippon Seiki's Growth Trending?

Nippon Seiki's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 285% gain to the company's bottom line. Pleasingly, EPS has also lifted 900% 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 41% each year as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 9.6% per year growth forecast for the broader market.

In light of this, it's curious that Nippon Seiki's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Following Nippon Seiki's share price tumble, its P/E is now hanging on to the median market P/E. 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.

We've established that Nippon Seiki currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Nippon Seiki that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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