Torii Pharmaceutical Co., Ltd.'s (TSE:4551) Business Is Yet to Catch Up With Its Share Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Torii Pharmaceutical Co., Ltd. (TSE:4551) as a stock to avoid entirely with its 25.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Torii Pharmaceutical 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Torii Pharmaceutical

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

Is There Enough Growth For Torii Pharmaceutical?

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

If we review the last year of earnings growth, the company posted a terrific increase of 53%. The strong recent performance means it was also able to grow EPS by 64% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 1.5% per year 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 Torii 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Torii Pharmaceutical's P/E

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.

We've established that Torii Pharmaceutical currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Torii Pharmaceutical that we have uncovered.

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.