What Nohmi Bosai Ltd.'s (TSE:6744) 27% Share Price Gain Is Not Telling You

Nohmi Bosai Ltd. (TSE:6744) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Nohmi Bosai as a stock to potentially avoid with its 17.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Nohmi Bosai as its earnings have been rising faster 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.

Check out our latest analysis for Nohmi Bosai

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

How Is Nohmi Bosai's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Nohmi Bosai'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 22%. As a result, it also grew EPS by 9.8% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 2.5% per annum during the coming three years according to the two analysts following the company. That's shaping up to be materially lower than the 9.3% each year growth forecast for the broader market.

In light of this, it's alarming that Nohmi Bosai's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Nohmi Bosai 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.

Our examination of Nohmi Bosai's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Nohmi Bosai you should know about.

You might be able to find a better investment than Nohmi Bosai. 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.