Getting In Cheap On Vifor Pharma AG (VTX:VIFN) Might Be Difficult

With a price-to-earnings (or "P/E") ratio of 56.6x Vifor Pharma AG (VTX:VIFN) may be sending very bearish signals at the moment, given that almost half of all companies in Switzerland have P/E ratios under 19x and even P/E's lower than 13x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Vifor Pharma's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Vifor Pharma

Does Vifor Pharma Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Vifor Pharma's industry may help to explain its particularly high P/E ratio. You'll notice in the figure below that P/E ratios in the Pharmaceuticals industry are also higher than the market. So this goes some way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be lifted by the general conditions within the Pharmaceuticals industry. However, what is happening on the company's own income statement is the most important factor to its P/E.

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What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Vifor Pharma's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.4% last year. EPS has also lifted 8.1% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 36% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 6.9% per annum, which is noticeably less attractive.

With this information, we can see why Vifor Pharma is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Vifor Pharma's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Vifor Pharma maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Vifor Pharma with six simple checks on some of these key factors.

If you're unsure about the strength of Vifor Pharma'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. 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.
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