What NCD Co., Ltd.'s (TSE:4783) 33% Share Price Gain Is Not Telling You

Those holding NCD Co., Ltd. (TSE:4783) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days bring the annual gain to a very sharp 59%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about NCD's P/E ratio of 11.7x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Our free stock report includes 1 warning sign investors should be aware of before investing in NCD. Read for free now.

With earnings growth that's superior to most other companies of late, NCD has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for NCD

Keen to find out how analysts think NCD's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For NCD?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 81% last year. The latest three year period has also seen an excellent 166% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 1.3% over the next year. With the market predicted to deliver 9.7% growth , the company is positioned for a weaker earnings result.

With this information, we find it interesting that NCD is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From NCD's P/E?

Its shares have lifted substantially and now NCD's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that NCD currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with NCD, and understanding should be part of your investment process.

If you're unsure about the strength of NCD'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.