Slammed 29% Nihon Dempa Kogyo Co., Ltd. (TSE:6779) Screens Well Here But There Might Be A Catch

Nihon Dempa Kogyo Co., Ltd. (TSE:6779) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 23% in that time.

In spite of the heavy fall in price, Nihon Dempa Kogyo's price-to-earnings (or "P/E") ratio of 8.6x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 13x and even P/E's above 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Nihon Dempa Kogyo could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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Is There Any Growth For Nihon Dempa Kogyo?

In order to justify its P/E ratio, Nihon Dempa Kogyo would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 41%. The last three years don't look nice either as the company has shrunk EPS by 26% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.6% per year, which is noticeably less attractive.

In light of this, it's peculiar that Nihon Dempa Kogyo's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Nihon Dempa Kogyo's P/E

Nihon Dempa Kogyo's P/E has taken a tumble along with its share price. 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 Nihon Dempa Kogyo currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Nihon Dempa Kogyo (1 is a bit unpleasant!) that you should be aware of before investing here.

You might be able to find a better investment than Nihon Dempa Kogyo. 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.