Benign Growth For Towa Pharmaceutical Co., Ltd. (TSE:4553) Underpins Its Share Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider Towa Pharmaceutical Co., Ltd. (TSE:4553) as an attractive investment with its 10x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Towa Pharmaceutical certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Towa Pharmaceutical

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

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Towa Pharmaceutical's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 144% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 7.0% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 2.4% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is noticeably more attractive.

In light of this, it's understandable that Towa Pharmaceutical's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Towa Pharmaceutical's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Towa Pharmaceutical's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Towa Pharmaceutical (1 doesn't sit too well with us!) that you should be aware of.

You might be able to find a better investment than Towa 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).

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

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.