Market Participants Recognise NEC Corporation's (TSE:6701) Earnings Pushing Shares 31% Higher

NEC Corporation (TSE:6701) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 61%.

Following the firm bounce in price, NEC's price-to-earnings (or "P/E") ratio of 26.6x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x and even P/E's below 9x 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 lofty.

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NEC 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.

Check out our latest analysis for NEC

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

How Is NEC's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. As a result, it also grew EPS by 27% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 14% per annum over the next three years. That's shaping up to be materially higher than the 9.8% each year growth forecast for the broader market.

In light of this, it's understandable that NEC's 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 Bottom Line On NEC's P/E

NEC's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that NEC maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for NEC with six simple checks on some of these key factors.

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