The Nihon Seima Co.,Ltd.'s (TSE:3306) Shareholders Might Be Looking For Exit

With a price-to-earnings (or "P/E") ratio of 14.4x The Nihon Seima Co.,Ltd. (TSE:3306) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 11x and even P/E's lower than 7x are not unusual. 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.

With earnings growth that's exceedingly strong of late, Nihon SeimaLtd has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Nihon SeimaLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Nihon SeimaLtd's earnings, revenue and cash flow.

How Is Nihon SeimaLtd's Growth Trending?

In order to justify its P/E ratio, Nihon SeimaLtd would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. The strong recent performance means it was also able to grow EPS by 34% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 9.9% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Nihon SeimaLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

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.

We've established that Nihon SeimaLtd currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Nihon SeimaLtd is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Nihon SeimaLtd, 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.

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