Namura Shipbuilding Co., Ltd.'s (TSE:7014) 48% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Namura Shipbuilding Co., Ltd. (TSE:7014) shares have been powering on, with a gain of 48% in the last thirty days. This latest share price bounce rounds out a remarkable 409% gain over the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that Namura Shipbuilding's price-to-earnings (or "P/E") ratio of 12.6x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Namura Shipbuilding certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Namura Shipbuilding

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Namura Shipbuilding will help you shine a light on its historical performance.

How Is Namura Shipbuilding's Growth Trending?

The only time you'd be comfortable seeing a P/E like Namura Shipbuilding's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 45% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

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

With this information, we find it interesting that Namura Shipbuilding is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Namura Shipbuilding's P/E is also back up to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Namura Shipbuilding currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Namura Shipbuilding you should know about.

If these risks are making you reconsider your opinion on Namura Shipbuilding, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.