Investors Don't See Light At End Of NGK Insulators, Ltd.'s (TSE:5333) Tunnel

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider NGK Insulators, Ltd. (TSE:5333) as an attractive investment with its 12.2x 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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With earnings growth that's superior to most other companies of late, NGK Insulators 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 NGK Insulators

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

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

The only time you'd be truly comfortable seeing a P/E as low as NGK Insulators' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 60% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 8.6% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 2.9% each year as estimated by the six analysts watching the company. With the market predicted to deliver 9.5% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that NGK Insulators' 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 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.

We've established that NGK Insulators maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with NGK Insulators.

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.