Investors Still Aren't Entirely Convinced By Nippi,Incorporated's (TSE:7932) Earnings Despite 30% Price Jump

Nippi,Incorporated (TSE:7932) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking further back, the 20% 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, NippiIncorporated's price-to-earnings (or "P/E") ratio of 7.1x 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.

We've discovered 1 warning sign about NippiIncorporated. View them for free.

NippiIncorporated has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for NippiIncorporated

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

How Is NippiIncorporated's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 23%. The strong recent performance means it was also able to grow EPS by 210% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 9.7% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that NippiIncorporated's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

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

Despite NippiIncorporated's shares building up a head of steam, its P/E still lags most other companies. 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 NippiIncorporated currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

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

You might be able to find a better investment than NippiIncorporated. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.