Benign Growth For Nippon Chutetsukan K.K. (TSE:5612) Underpins Stock's 35% Plummet

Nippon Chutetsukan K.K. (TSE:5612) shares have had a horrible month, losing 35% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 13% share price drop.

In spite of the heavy fall 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 Chutetsukan K.K 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.

The earnings growth achieved at Nippon Chutetsukan K.K over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Nippon Chutetsukan K.K

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

Does Growth Match The Low P/E?

Nippon Chutetsukan K.K's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 11% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.8% shows it's an unpleasant look.

In light of this, it's understandable that Nippon Chutetsukan K.K's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Nippon Chutetsukan K.K's P/E

Nippon Chutetsukan K.K's P/E has taken a tumble along with its share price. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Nippon Chutetsukan K.K maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Nippon Chutetsukan K.K (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

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