The Price Is Right For Nippon Shokubai Co., Ltd. (TSE:4114)

With a price-to-earnings (or "P/E") ratio of 23.2x Nippon Shokubai Co., Ltd. (TSE:4114) may be sending very bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Nippon Shokubai could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Nippon Shokubai

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

How Is Nippon Shokubai's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Nippon Shokubai's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 20% each year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 9.6% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Nippon Shokubai's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

We've established that Nippon Shokubai maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Nippon Shokubai that we have uncovered.

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

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

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.