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华尔街日报There Is A Reason Nifco Inc.'s (TSE:7988) Price Is Undemanding
When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Nifco Inc. (TSE:7988) as an attractive investment with its 9.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Nifco has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Nifco
Is There Any Growth For Nifco?
The only time you'd be truly comfortable seeing a P/E as low as Nifco's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 203%. The latest three year period has also seen an excellent 105% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 3.2% each year during the coming three years according to the seven analysts following the company. Meanwhile, the broader market is forecast to expand by 9.0% each year, which paints a poor picture.
With this information, we are not surprised that Nifco is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Nifco'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.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Nifco that you need to be mindful of.
If you're unsure about the strength of Nifco'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.