Nomura Research Institute (TSE:4307) has a price-to-earnings (P/E) ratio of 35, which may be sending a very bearish signal at this point, given that almost half of Japanese companies have P/E ratios below 13, and P/Es below 9 are not uncommon. However, there may be a reason why the P/E is so high, and further investigation is needed to determine if it is justified.
Nomura Research Institute has certainly been doing well recently, growing its profits faster than most other companies. Many seem to expect this good performance to continue, which is leading to a rising price-to-earnings multiple. If not, existing shareholders might be a bit nervous about the viability of the stock.
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TSE:4307 Price to Earnings Ratio vs Industry 22 September 2024 If you want to see what analysts are predicting going forward, check out this free report from Nomura Research Institute.
What do growth metrics tell us about a high P/E?
For a price-to-earnings ratio like Nomura Research Institute’s to be considered reasonable, there is an inherent assumption that the company must perform significantly better than the market.
Looking back, the company’s bottom line grew an exceptional 16% last year. Pleasantly, EPS has also grown over the past 12 months, bringing its EPS up a total of 51% compared to three years ago. So it’s fair to say the company’s recent revenue growth has been impressive.
Looking ahead, analysts covering the company are predicting that revenue will grow 10% annually over the next three years, which is shaping up to be roughly in line with the overall market’s 9.5% annual growth forecast.
With this in mind, it’s interesting to see that Nomura Research Institute’s price-to-earnings ratio is higher than most other companies. Many of the company’s investors are more bullish than analysts suggest and don’t seem interested in exiting the stock at this point. However, this level of earnings growth will likely eventually drag down the stock price, making it hard to make any further gains.
Nomura Research Institute’s PER Conclusion
While you should generally be careful not to overinterpret price-to-earnings ratios when making investment decisions, sometimes price-to-earnings ratios can reveal a lot about what other market participants think about a company.
We find that Nomura Research Institute’s forecasted growth rate is in line with the overall market, so the company’s shares are currently trading at a higher P/E ratio than expected. At this point, we feel uneasy about the relatively high share price, as expected future earnings are unlikely to support such positive sentiment for the long term. This puts shareholders’ investments at risk, and potential investors at risk of paying an unnecessary premium.
There are many other important risk factors to be found on a company’s balance sheet, and Nomura Research Institute’s free balance sheet analysis uses six simple checks to help you uncover potential problem areas.
It’s important to find great companies and not just the first idea you see, so take a peek at this free list of interesting companies with strong recent earnings growth (and low P/E ratios).
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
