Earnings Working Against Nankai Plywood Co.,Ltd.'s (TSE:7887) Share Price

Nankai Plywood Co.,Ltd.'s (TSE:7887) price-to-earnings (or "P/E") ratio of 6.4x might make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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With earnings growth that's exceedingly strong of late, Nankai PlywoodLtd has been doing very well. One possibility is that the P/E is low because investors think this strong 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.

View our latest analysis for Nankai PlywoodLtd

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What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Nankai PlywoodLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 76% gain to the company's bottom line. The latest three year period has also seen a 8.2% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.6% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Nankai PlywoodLtd is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Nankai PlywoodLtd's P/E

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.

We've established that Nankai PlywoodLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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 rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Nankai PlywoodLtd you should know about.

If you're unsure about the strength of Nankai PlywoodLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.