Getting In Cheap On Kissei Pharmaceutical Co., Ltd. (TSE:4547) Is Unlikely

It's not a stretch to say that Kissei Pharmaceutical Co., Ltd.'s (TSE:4547) price-to-earnings (or "P/E") ratio of 13.3x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 15x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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There hasn't been much to differentiate Kissei Pharmaceutical's and the market's earnings growth lately. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

View our latest analysis for Kissei Pharmaceutical

Keen to find out how analysts think Kissei Pharmaceutical's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Kissei Pharmaceutical's Growth Trending?

In order to justify its P/E ratio, Kissei Pharmaceutical would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a worthy increase of 7.3%. EPS has also lifted 26% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 0.2% per annum as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 9.7% per year growth forecast for the broader market.

With this information, we find it interesting that Kissei Pharmaceutical is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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 Kissei Pharmaceutical currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Kissei Pharmaceutical (of which 1 shouldn't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Kissei Pharmaceutical. 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.