Nissan Chemical Corporation (TSE:4021) Investors Are Less Pessimistic Than Expected

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Nissan Chemical Corporation (TSE:4021) as a stock to potentially avoid with its 16.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Recent times have been advantageous for Nissan Chemical as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Nissan Chemical

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nissan Chemical.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Nissan Chemical's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 7.3% per year as estimated by the nine analysts watching the company. With the market predicted to deliver 9.0% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Nissan Chemical is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Nissan Chemical's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Nissan Chemical's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Nissan Chemical with six simple checks on some of these key factors.

If you're unsure about the strength of Nissan Chemical'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.