Nomura Micro Science Co., Ltd.'s (TSE:6254) 34% Share Price Surge Not Quite Adding Up

Nomura Micro Science Co., Ltd. (TSE:6254) shares have continued their recent momentum with a 34% gain in the last month alone. This latest share price bounce rounds out a remarkable 313% gain over the last twelve months.

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 Nomura Micro Science as a stock to potentially avoid with its 18.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Nomura Micro Science certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Nomura Micro Science

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Nomura Micro Science would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 168% last year. The latest three year period has also seen an excellent 309% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 6.4% as estimated by the dual analysts watching the company. With the market predicted to deliver 11% growth , that's a disappointing outcome.

In light of this, it's alarming that Nomura Micro Science's P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Final Word

Nomura Micro Science shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that Nomura Micro Science currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Nomura Micro Science, and understanding should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.