COSMOS Pharmaceutical Corporation's (TSE:3349) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 21.5x COSMOS Pharmaceutical Corporation (TSE:3349) may be sending very bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for COSMOS Pharmaceutical as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for COSMOS Pharmaceutical

If you'd like to see what analysts are forecasting going forward, you should check out our free report on COSMOS Pharmaceutical.

How Is COSMOS Pharmaceutical's Growth Trending?

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

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. The latest three year period has also seen a 7.7% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.4% per annum over the next three years. That's shaping up to be materially lower than the 10% each year growth forecast for the broader market.

With this information, we find it concerning that COSMOS Pharmaceutical is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of COSMOS Pharmaceutical'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. You can assess many of the main risks through our free balance sheet analysis for COSMOS Pharmaceutical with six simple checks.

You might be able to find a better investment than COSMOS Pharmaceutical. 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.