Investors Appear Satisfied With Nitto Kohki Co., Ltd.'s (TSE:6151) Prospects As Shares Rocket 26%

Nitto Kohki Co., Ltd. (TSE:6151) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Nitto Kohki as a stock to potentially avoid with its 19.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

The earnings growth achieved at Nitto Kohki over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Nitto Kohki

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Nitto Kohki's earnings, revenue and cash flow.

How Is Nitto Kohki's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Nitto Kohki's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 7.6% gain to the company's bottom line. Pleasingly, EPS has also lifted 51% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Nitto Kohki is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Nitto Kohki's P/E?

Nitto Kohki's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Nitto Kohki revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Nitto Kohki (1 is concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Nitto Kohki's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.