Nippon Paint Holdings Co., Ltd.'s (TSE:4612) Share Price Not Quite Adding Up

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Nippon Paint Holdings Co., Ltd. (TSE:4612) as a stock to potentially avoid with its 16.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate Nippon Paint Holdings' and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Nippon Paint Holdings

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

How Is Nippon Paint Holdings' Growth Trending?

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

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 63% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.4% per year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.3% each year, which is not materially different.

In light of this, it's curious that Nippon Paint Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Nippon Paint Holdings' P/E?

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 Paint Holdings currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Nippon Paint Holdings with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Nippon Paint Holdings. 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.