Nissin Foods Holdings Co.,Ltd.'s (TSE:2897) Share Price Not Quite Adding Up

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Nissin Foods Holdings Co.,Ltd. (TSE:2897) as a stock to avoid entirely with its 20.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Nissin Foods HoldingsLtd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Nissin Foods HoldingsLtd

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

How Is Nissin Foods HoldingsLtd's Growth Trending?

Nissin Foods HoldingsLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.4% last year. This was backed up an excellent period prior to see EPS up by 60% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 5.7% per year during the coming three years according to the ten analysts following the company. That's shaping up to be materially lower than the 9.2% per annum growth forecast for the broader market.

With this information, we find it concerning that Nissin Foods HoldingsLtd is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Nissin Foods HoldingsLtd's P/E?

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 Nissin Foods HoldingsLtd 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Nissin Foods HoldingsLtd that you should be aware of.

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.