Rohto Pharmaceutical Co.,Ltd. (TSE:4527) 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 Rohto Pharmaceutical Co.,Ltd. (TSE:4527) as a stock to potentially avoid with its 16.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Rohto PharmaceuticalLtd as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Rohto PharmaceuticalLtd
Is There Enough Growth For Rohto PharmaceuticalLtd?
There's an inherent assumption that a company should outperform the market for P/E ratios like Rohto PharmaceuticalLtd's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 54% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 1.5% per year over the next three years. That's shaping up to be materially lower than the 9.0% per annum growth forecast for the broader market.
In light of this, it's alarming that Rohto PharmaceuticalLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Rohto PharmaceuticalLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Rohto PharmaceuticalLtd with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Rohto PharmaceuticalLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.