Market Participants Recognise Nichicon Corporation's (TSE:6996) Earnings Pushing Shares 35% Higher

Nichicon Corporation (TSE:6996) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

Following the firm bounce in price, Nichicon may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 33.1x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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While the market has experienced earnings growth lately, Nichicon's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Nichicon

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

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Nichicon would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 58% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 36% each year over the next three years. That's shaping up to be materially higher than the 9.2% per annum growth forecast for the broader market.

With this information, we can see why Nichicon is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Nichicon's P/E

Nichicon's P/E is flying high just like its stock has during the last month. 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 Nichicon maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Nichicon that you should be aware of.

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