Earnings Tell The Story For Shin Nippon Biomedical Laboratories, Ltd. (TSE:2395) As Its Stock Soars 26%

Shin Nippon Biomedical Laboratories, Ltd. (TSE:2395) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, Shin Nippon Biomedical Laboratories' price-to-earnings (or "P/E") ratio of 16.3x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Shin Nippon Biomedical Laboratories certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shin Nippon Biomedical Laboratories

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How Is Shin Nippon Biomedical Laboratories' Growth Trending?

In order to justify its P/E ratio, Shin Nippon Biomedical Laboratories would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Still, incredibly EPS has fallen 42% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 17% per annum during the coming three years according to the two analysts following the company. That's shaping up to be materially higher than the 9.1% per annum growth forecast for the broader market.

In light of this, it's understandable that Shin Nippon Biomedical Laboratories' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shin Nippon Biomedical Laboratories shares have received a push in the right direction, but its P/E is elevated too. 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 Shin Nippon Biomedical Laboratories maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shin Nippon Biomedical Laboratories that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.