Nippon Kinzoku Co., Ltd. (TSE:5491) Shares Fly 30% But Investors Aren't Buying For Growth

Nippon Kinzoku Co., Ltd. (TSE:5491) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.6% in the last twelve months.

In spite of the firm bounce in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Nippon Kinzoku as an attractive investment with its 7.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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For instance, Nippon Kinzoku's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Nippon Kinzoku

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nippon Kinzoku will help you shine a light on its historical performance.

Is There Any Growth For Nippon Kinzoku?

In order to justify its P/E ratio, Nippon Kinzoku would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 54%. The last three years don't look nice either as the company has shrunk EPS by 72% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.2% shows it's an unpleasant look.

With this information, we are not surprised that Nippon Kinzoku is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From Nippon Kinzoku's P/E?

Nippon Kinzoku's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Nippon Kinzoku revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Nippon Kinzoku is showing 3 warning signs in our investment analysis, you should know about.

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).

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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.