Market Participants Recognise Nippon Chemical Industrial Co., Ltd.'s (TSE:4092) Earnings Pushing Shares 26% Higher

Nippon Chemical Industrial Co., Ltd. (TSE:4092) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking further back, the 23% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Nippon Chemical Industrial as a stock to avoid entirely with its 22.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Nippon Chemical Industrial hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Nippon Chemical Industrial

Keen to find out how analysts think Nippon Chemical Industrial's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Nippon Chemical Industrial?

In order to justify its P/E ratio, Nippon Chemical Industrial would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 53% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 40% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 58% during the coming year according to the one analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 11%, which is noticeably less attractive.

In light of this, it's understandable that Nippon Chemical Industrial's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Nippon Chemical Industrial's P/E is flying high just like its stock has during the last month. 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 Nippon Chemical Industrial's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Nippon Chemical Industrial has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Nippon Chemical Industrial, 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.