Nitto Boseki Co., Ltd. (TSE:3110) shares have continued their recent momentum with a 36% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 6.3% isn't as attractive.
After such a large jump in price, Nitto Boseki's price-to-earnings (or "P/E") ratio of 18.5x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With earnings growth that's superior to most other companies of late, Nitto Boseki has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Nitto Boseki
How Is Nitto Boseki's Growth Trending?
In order to justify its P/E ratio, Nitto Boseki would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 76%. Pleasingly, EPS has also lifted 110% 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.
Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the eight analysts following the company. That's shaping up to be materially higher than the 8.9% each year growth forecast for the broader market.
In light of this, it's understandable that Nitto Boseki's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
Nitto Boseki's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Nitto Boseki's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You should always think about risks. Case in point, we've spotted 1 warning sign for Nitto Boseki you should be aware of.
You might be able to find a better investment than Nitto Boseki. 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).
Valuation is complex, but we're here to simplify it.
Discover if Nitto Boseki might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.