Earnings Not Telling The Story For Nihon M&A Center Holdings Inc. (TSE:2127) After Shares Rise 33%

Nihon M&A Center Holdings Inc. (TSE:2127) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 15% in the last twelve months.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Nihon M&A Center Holdings as a stock to potentially avoid with its 18.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Nihon M&A Center Holdings could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

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

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Is There Enough Growth For Nihon M&A Center Holdings?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.5% last year. Although, the latest three year period in total hasn't been as good 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.

Looking ahead now, EPS is anticipated to climb by 5.2% per year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.8% per annum, which is noticeably more attractive.

In light of this, it's alarming that Nihon M&A Center Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Nihon M&A Center Holdings' P/E is getting right up there since its shares have risen strongly. 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 Nihon M&A Center Holdings currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Nihon M&A Center Holdings with six simple checks.

If these risks are making you reconsider your opinion on Nihon M&A Center Holdings, 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.