Unpleasant Surprises Could Be In Store For Rohto Pharmaceutical Co.,Ltd.'s (TSE:4527) Shares

Rohto Pharmaceutical Co.,Ltd.'s (TSE:4527) price-to-earnings (or "P/E") ratio of 22.1x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. 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.

Rohto PharmaceuticalLtd certainly has been doing a good job lately as it's been growing earnings more 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.

Check out our latest analysis for Rohto PharmaceuticalLtd

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

Rohto PharmaceuticalLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. The strong recent performance means it was also able to grow EPS by 85% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the eight analysts following the company. With the market predicted to deliver 9.5% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Rohto PharmaceuticalLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Rohto PharmaceuticalLtd's P/E?

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 Rohto PharmaceuticalLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

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

Of course, you might also be able to find a better stock than Rohto PharmaceuticalLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.