Investors Appear Satisfied With Nabtesco Corporation's (TSE:6268) Prospects

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Nabtesco Corporation (TSE:6268) as a stock to avoid entirely with its 30.6x 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 so lofty.

While the market has experienced earnings growth lately, Nabtesco's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Nabtesco

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

Is There Enough Growth For Nabtesco?

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

Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 89% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 21% each year during the coming three years according to the eleven analysts following the company. That's shaping up to be materially higher than the 9.1% per annum growth forecast for the broader market.

With this information, we can see why Nabtesco is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Nabtesco's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Nabtesco maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Nabtesco (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

If you're unsure about the strength of Nabtesco'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.