Cheap entry into NEC Corporation (TSE:6701) is unlikely

With a price-to-earnings ratio (or “P/E”) of 19.7x NEC company (TSE:6701) could be sending bearish signals right now, considering that almost half of all companies in Japan have price-to-earnings ratios below 14x and even price-to-earnings ratios below 9x are not uncommon. However, the price-to-earnings ratio may be high for a reason and further research is needed to determine if this is justified.

NEC has certainly done a good job lately as profits have grown more than most other companies. The price/earnings ratio is likely high because investors believe this strong earnings performance will continue. You’d really hope so, otherwise you’d be paying a pretty high price for no particular reason.

Check out our latest analysis for NEC

TSE:6701 Price-to-earnings ratio versus sector May 21, 2024

Want to get the full picture of analyst estimates for the company? Then our free The report on NEC will help you discover what’s on the horizon.

Is there enough growth for NEC?

To justify its price/earnings ratio, NEC would need to achieve impressive above-market growth.

Looking back first, we see that the company grew earnings per share by a whopping 32% last year. Yet earnings per share have barely increased in total compared to three years ago, which is not ideal. So it seems to us that the company has had a mixed performance in terms of growing profits over that period.

Looking ahead now, earnings per share are expected to grow 10% per year over the next three years, according to the eleven analysts covering the company. That appears to be comparable to the expected 9.2% annual growth for the broader market.

With this information, we find it interesting that NEC is trading at a high price/earnings compared to the market. Apparently, many investors in the company are more optimistic than analysts indicate and are unwilling to let go of their shares at this time. These shareholders may be disappointed if the price-earnings ratio falls to a level more in line with growth prospects.

What can we learn from NEC’s price-earnings ratio?

While the price-to-earnings ratio shouldn’t be the determining factor in whether you buy a stock or not, it is a good barometer of earnings expectations.

Our review of NEC’s analyst forecasts found that the earnings outlook in line with the market isn’t impacting the high price-to-earnings ratio as much as we expected. If we see average earnings prospects with market-like growth, we suspect the stock price is at risk of falling, driving the high price-to-earnings ratio lower. Unless these conditions improve, it is challenging to accept these prices as reasonable.

There can be many potential risks on a company’s balance sheet. Us free Balance sheet analysis for NEC with six simple checks allows you to spot any risks that could be a problem.

You may be able to find a better investment than NEC. If you want a selection of possible candidates, look here free list of interesting companies that trade at a low price/earnings (but have proven that they can grow their profits).

Valuation is complex, but we help make it simple.

Find out if NEC is potentially over or undervalued by viewing our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

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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 is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.