A Sliding Share Price Has Us Looking At Vifor Pharma AG's (VTX:VIFN) P/E Ratio

Unfortunately for some shareholders, the Vifor Pharma (VTX:VIFN) share price has dived 37% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 15% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Vifor Pharma

How Does Vifor Pharma's P/E Ratio Compare To Its Peers?

Vifor Pharma's P/E of 48.55 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (18.0) for companies in the pharmaceuticals industry is lower than Vifor Pharma's P/E.

Its relatively high P/E ratio indicates that Vifor Pharma shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Vifor Pharma increased earnings per share by 4.4% last year. And its annual EPS growth rate over 3 years is 2.6%. In contrast, EPS has decreased by 11%, annually, over 5 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Vifor Pharma's Balance Sheet Tell Us?

The extra options and safety that comes with Vifor Pharma's CHF5.2m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Vifor Pharma's P/E Ratio

Vifor Pharma has a P/E of 48.6. That's higher than the average in its market, which is 16.4. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen! What can be absolutely certain is that the market has become significantly less optimistic about Vifor Pharma over the last month, with the P/E ratio falling from 76.8 back then to 48.6 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.