With NH Foods Ltd. (TSE:2282) It Looks Like You'll Get What You Pay For

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider NH Foods Ltd. (TSE:2282) as a stock to potentially avoid with its 17.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

NH Foods certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for NH Foods

If you'd like to see what analysts are forecasting going forward, you should check out our free report on NH Foods.

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 55%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 14% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 14% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.6% per annum, which is noticeably less attractive.

With this information, we can see why NH Foods is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of NH Foods' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for NH Foods with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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