Nihon M&A Center Holdings Inc.'s (TSE:2127) 35% Jump Shows Its Popularity With Investors

Nihon M&A Center Holdings Inc. (TSE:2127) shares have continued their recent momentum with a 35% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.2% in the last twelve months.

Since its price has surged higher, Nihon M&A Center Holdings' price-to-earnings (or "P/E") ratio of 32.3x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Nihon M&A Center Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Nihon M&A Center Holdings

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Nihon M&A Center Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 2.5% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 12% per annum over the next three years. That's shaping up to be materially higher than the 9.9% per year growth forecast for the broader market.

In light of this, it's understandable that Nihon M&A Center Holdings' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Nihon M&A Center Holdings' P/E?

Nihon M&A Center Holdings' P/E is flying high just like its stock has during the last month. 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 Nihon M&A Center Holdings 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Nihon M&A Center Holdings that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.