Earnings Not Telling The Story For NOF Corporation (TSE:4403) After Shares Rise 28%

NOF Corporation (TSE:4403) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, there still wouldn't be many who think NOF's price-to-earnings (or "P/E") ratio of 14.9x is worth a mention when the median P/E in Japan is similar at about 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent earnings growth for NOF has been in line with the market. The P/E is probably moderate because investors think this modest earnings performance will continue. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

Check out our latest analysis for NOF

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

How Is NOF's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like NOF's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 11%. Pleasingly, EPS has also lifted 45% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 5.9% per annum during the coming three years according to the three analysts following the company. That's shaping up to be materially lower than the 9.4% each year growth forecast for the broader market.

With this information, we find it interesting that NOF is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From NOF's P/E?

Its shares have lifted substantially and now NOF's P/E is also back up to the market median. 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.

Our examination of NOF's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for NOF with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.