Improved Earnings Required Before Nishi-Nippon Railroad Co., Ltd. (TSE:9031) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 7.3x Nishi-Nippon Railroad Co., Ltd. (TSE:9031) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Nishi-Nippon Railroad 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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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Nishi-Nippon Railroad would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 120% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.3% per year as estimated by the dual analysts watching the company. Meanwhile, the broader market is forecast to expand by 8.5% each year, which paints a poor picture.

In light of this, it's understandable that Nishi-Nippon Railroad's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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 Nishi-Nippon Railroad maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Nishi-Nippon Railroad (2 don't sit too well with us!) that you should be aware of.

If these risks are making you reconsider your opinion on Nishi-Nippon Railroad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.