It's Down 34% But Nireco Corporation (TSE:6863) Could Be Riskier Than It Looks

Unfortunately for some shareholders, the Nireco Corporation (TSE:6863) share price has dived 34% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 15% in that time.

In spite of the heavy fall in price, Nireco's price-to-earnings (or "P/E") ratio of 7.3x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Nireco certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

View our latest analysis for Nireco

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Is There Any Growth For Nireco?

Nireco's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. Pleasingly, EPS has also lifted 132% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the one analyst following the company. That's shaping up to be materially higher than the 9.6% each year growth forecast for the broader market.

In light of this, it's peculiar that Nireco's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

The softening of Nireco's shares means its P/E is now sitting at a pretty low level. 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 Nireco currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Plus, you should also learn about these 3 warning signs we've spotted with Nireco (including 1 which is a bit unpleasant).

You might be able to find a better investment than Nireco. 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.

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