Insufficient Growth At Nifco Inc. (TSE:7988) Hampers Share Price

Nifco Inc.'s (TSE:7988) price-to-earnings (or "P/E") ratio of 8.6x might make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 23x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Nifco has been doing relatively well. 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.

Check out our latest analysis for Nifco

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

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Nifco would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 172% last year. Pleasingly, EPS has also lifted 94% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 4.2% per year as estimated by the eight analysts watching the company. That's not great when the rest of the market is expected to grow by 9.6% each year.

In light of this, it's understandable that Nifco'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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Nifco's 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.

As we suspected, our examination of Nifco's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Nifco (including 1 which makes us a bit uncomfortable).

You might be able to find a better investment than Nifco. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.