Benign Growth For Nippon Shinyaku Co., Ltd. (TSE:4516) Underpins Its Share Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider Nippon Shinyaku Co., Ltd. (TSE:4516) as an attractive investment with its 8.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Nippon Shinyaku certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Nippon Shinyaku

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Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 9.4% each year over the next three years. That's not great when the rest of the market is expected to grow by 9.3% each year.

With this information, we are not surprised that Nippon Shinyaku 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 the weak outlook is weighing down the shares.

The Key Takeaway

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 Shinyaku maintains its low P/E on the weakness of its forecast for sliding earnings, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Nippon Shinyaku (1 is potentially serious!) that you should be aware of.

You might be able to find a better investment than Nippon Shinyaku. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.