Nihon Seiko Co., Ltd.'s (TSE:5729) Price Is Right But Growth Is Lacking After Shares Rocket 26%

The Nihon Seiko Co., Ltd. (TSE:5729) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

Even after such a large jump in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Nihon Seiko as an attractive investment with its 9.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Nihon Seiko has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Nihon Seiko

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

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 360%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 31% overall. 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 12% shows it's an unpleasant look.

In light of this, it's understandable that Nihon Seiko'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. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

The latest share price surge wasn't enough to lift Nihon Seiko's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Nihon Seiko revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 4 warning signs for Nihon Seiko (1 can't be ignored!) that you need to take into consideration.

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.