Namura Shipbuilding Co., Ltd.'s (TSE:7014) Share Price Boosted 28% But Its Business Prospects Need A Lift Too

Namura Shipbuilding Co., Ltd. (TSE:7014) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking further back, the 15% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may still consider Namura Shipbuilding as a highly attractive investment with its 4.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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With earnings growth that's exceedingly strong of late, Namura Shipbuilding has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Namura Shipbuilding

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 Namura Shipbuilding's earnings, revenue and cash flow.

Is There Any Growth For Namura Shipbuilding?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Namura Shipbuilding's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 180% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.7% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Namura Shipbuilding is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Namura Shipbuilding's P/E?

Even after such a strong price move, Namura Shipbuilding's P/E still trails the rest of the market significantly. 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.

We've established that Namura Shipbuilding maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Namura Shipbuilding has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Namura Shipbuilding. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.