Nippon Yusen Kabushiki Kaisha's (TSE:9101) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 4.3x Nippon Yusen Kabushiki Kaisha (TSE:9101) may be sending very bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 21x are not unusual. 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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Recent times have been advantageous for Nippon Yusen Kabushiki Kaisha as its earnings have been rising faster than most other companies. 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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Does Growth Match The Low P/E?

Nippon Yusen Kabushiki Kaisha's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 110% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 29% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 18% per annum as estimated by the nine analysts watching the company. That's not great when the rest of the market is expected to grow by 9.8% per annum.

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

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.

As we suspected, our examination of Nippon Yusen Kabushiki Kaisha's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Nippon Yusen Kabushiki Kaisha (1 is a bit concerning!) that we have uncovered.

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.