Chugai Pharmaceutical Co., Ltd.'s (TSE:4519) Business Is Trailing The Market But Its Shares Aren't

Chugai Pharmaceutical Co., Ltd.'s (TSE:4519) price-to-earnings (or "P/E") ratio of 25x 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.

Chugai Pharmaceutical could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Chugai Pharmaceutical

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Chugai Pharmaceutical's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.2% last year. The latest three year period has also seen an excellent 55% overall rise in EPS, aided somewhat by its short-term performance. 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 6.3% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 9.6% per annum growth forecast for the broader market.

With this information, we find it concerning that Chugai Pharmaceutical is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

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.

Our examination of Chugai 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.

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

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com