Orchid Pharma Limited's (NSE:ORCHPHARMA) P/E Is Still On The Mark Following 25% Share Price Bounce

Orchid Pharma Limited (NSE:ORCHPHARMA) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last month tops off a massive increase of 178% in the last year.

Since its price has surged higher, Orchid Pharma's price-to-earnings (or "P/E") ratio of 66.6x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 31x and even P/E's below 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Orchid Pharma hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 54% per year over the next three years. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

With this information, we can see why Orchid 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.

What We Can Learn From Orchid Pharma's P/E?

The strong share price surge has got Orchid Pharma's P/E rushing to great heights as well. 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.

We've established that Orchid 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. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Orchid Pharma with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Orchid Pharma, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.