Take Care Before Jumping Onto Nankai Chemical Company,Limited (TSE:4040) Even Though It's 25% Cheaper

To the annoyance of some shareholders, Nankai Chemical Company,Limited (TSE:4040) shares are down a considerable 25% in the last month, which continues a horrid run for the company. Still, a bad month hasn't completely ruined the past year with the stock gaining 46%, which is great even in a bull market.

Although its price has dipped substantially, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Nankai Chemical CompanyLimited as a highly attractive investment with its 5.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Nankai Chemical CompanyLimited has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Nankai Chemical CompanyLimited

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 Nankai Chemical CompanyLimited's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Nankai Chemical CompanyLimited would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 50% last year. Pleasingly, EPS has also lifted 300% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.6% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Nankai Chemical CompanyLimited's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Nankai Chemical CompanyLimited's P/E

Shares in Nankai Chemical CompanyLimited have plummeted and its P/E is now low enough to touch the ground. 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.

Our examination of Nankai Chemical CompanyLimited revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Nankai Chemical CompanyLimited (2 are a bit concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Nankai Chemical CompanyLimited's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.