NPC Incorporated's (TSE:6255) 36% Share Price Surge Not Quite Adding Up

Despite an already strong run, NPC Incorporated (TSE:6255) shares have been powering on, with a gain of 36% in the last thirty days. The annual gain comes to 106% following the latest surge, making investors sit up and take notice.

After such a large jump in price, NPC may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.7x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

NPC 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for NPC

If you'd like to see what analysts are forecasting going forward, you should check out our free report on NPC.

How Is NPC's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as NPC's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 103%. The strong recent performance means it was also able to grow EPS by 50% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.5% per annum as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 9.6% per annum, which is not materially different.

With this information, we find it interesting that NPC is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

NPC's P/E is getting right up there since its shares have risen strongly. 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 NPC currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for NPC that you should be aware of.

You might be able to find a better investment than NPC. 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.