Positive Sentiment Still Eludes Nippon Carbide Industries Co., Inc. (TSE:4064) Following 29% Share Price Slump

Nippon Carbide Industries Co., Inc. (TSE:4064) shares have had a horrible month, losing 29% after a relatively good period beforehand. The recent drop has obliterated the annual return, with the share price now down 5.0% over that longer period.

Although its price has dipped substantially, it's still not a stretch to say that Nippon Carbide Industries' price-to-earnings (or "P/E") ratio of 13x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Nippon Carbide Industries has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

Check out our latest analysis for Nippon Carbide Industries

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Nippon Carbide Industries' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 201% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 62% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 38% per annum over the next three years. That's shaping up to be materially higher than the 9.6% per year growth forecast for the broader market.

In light of this, it's curious that Nippon Carbide Industries' P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Nippon Carbide Industries' plummeting stock price has brought its P/E right back to the rest of the market. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Nippon Carbide Industries currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Nippon Carbide Industries that you need to be mindful of.

Of course, you might also be able to find a better stock than Nippon Carbide Industries. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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