Benign Growth For Nippon Yusen Kabushiki Kaisha (TSE:9101) Underpins Its Share Price

Nippon Yusen Kabushiki Kaisha's (TSE:9101) price-to-earnings (or "P/E") ratio of 5.4x might make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 23x 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 limited.

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With earnings growth that's superior to most other companies of late, Nippon Yusen Kabushiki Kaisha has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you 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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How Is Nippon Yusen Kabushiki Kaisha's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Nippon Yusen Kabushiki Kaisha's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 71%. Still, incredibly EPS has fallen 58% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings growth is heading into negative territory, declining 16% each year over the next three years. Meanwhile, the broader market is forecast to expand by 9.5% per annum, which paints a poor picture.

With this information, we are not surprised that Nippon Yusen Kabushiki Kaisha is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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 Nippon Yusen Kabushiki Kaisha maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Nippon Yusen Kabushiki Kaisha (1 is a bit unpleasant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Nippon Yusen Kabushiki Kaisha, 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.