What You Can Learn From NGK Insulators, Ltd.'s (TSE:5333) P/E

With a median price-to-earnings (or "P/E") ratio of close to 13x in Japan, you could be forgiven for feeling indifferent about NGK Insulators, Ltd.'s (TSE:5333) P/E ratio of 11.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

NGK Insulators could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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.

Does Growth Match The P/E?

In order to justify its P/E ratio, NGK Insulators would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a decent 6.2% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 18% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 11% each year over the next three years. That's shaping up to be similar to the 10% per year growth forecast for the broader market.

With this information, we can see why NGK Insulators is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Bottom Line On NGK Insulators' P/E

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 NGK Insulators' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for NGK Insulators that we have uncovered.

You might be able to find a better investment than NGK Insulators. 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.