Nichidenbo Corporation’s (TWSE:3090) share price rise of 29% doesn’t quite add up

The Nichidenbo Corporation (TWSE:3090) The share price has performed very well over the last month, recording an excellent rise of 29%. Looking back a little further, it’s encouraging to see that the stock is up 33% in the last year.

Although the price has increased, there are still not many who consider Nichidenbo’s price-to-earnings ratio (or “P/E”) of 19.6 worth mentioning, when the median P/E ratio in Taiwan is around a similar 21x. However, it is not advisable to simply ignore the P/E ratio without explanation, as investors may be ignoring a clear opportunity or a costly mistake.

With earnings growth that’s better than most companies recently, Nichidenbo is doing relatively well. One possibility is that the P/E ratio is moderate because investors believe this strong earnings performance may soon fade. If you like the company, you’re hoping it doesn’t, so you might be able to buy shares even though they’re not entirely popular.

Check out our latest analysis for Nichidenbo

Want to know how analysts rate Nichidenbo’s future compared to the industry? In this case ours free The report is a good start.

Does the growth correspond to the P/E ratio?

Nichidenbo’s P/E ratio would be typical for a company that is only expected to achieve moderate growth and, above all, perform in line with the market.

If we first look back, we see that the company managed to grow earnings per share by a respectable 14% last year. However, due to the unimpressive performance prior to this period, overall EPS growth over the last three years is virtually non-existent. Accordingly, shareholders probably would not have been too happy with the unstable medium-term growth rates.

Looking ahead, earnings per share are expected to decline, shrinking 0.9% next year, according to the analyst who covers the company. Meanwhile, the broader market is forecast to grow by 24%, painting a poor picture.

With that in mind, it’s somewhat alarming that Nichidenbo’s P/E ratio is in line with most other companies. Apparently, many of the company’s investors reject the pessimism of the analyst cohort and are currently unwilling to let go of their shares. Only the bravest assume that these prices are sustainable, as these falling profits are likely to ultimately weigh on the share price.

The key takeaway

Nichidenbo stock has had a lot of momentum recently, which has resulted in its P/E ratio being in line with the market. We would say that the price-to-earnings ratio is not primarily a valuation tool, but rather is used to measure current investor sentiment and future expectations.

We’ve noted that Nichidenbo is currently trading at a higher than expected P/E ratio for a company whose earnings are expected to decline. At the moment we are unhappy with the P/E ratio as projected future earnings are unlikely to support more positive sentiment in the long term. This puts shareholders’ investments at risk and potential investors risk paying an unnecessary premium.

Be aware of this Nichidenbo shows 1 warning sign You should know about this in our investment analysis.

If you are interested in P/E ratiosmaybe you would like to see this free Collection of other companies with strong earnings growth and low P/E ratios.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.