Towa Pharmaceutical Co., Ltd.'s (TSE:4553) Price Is Right But Growth Is Lacking

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 a highly attractive investment with its 6.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

We've discovered 3 warning signs about Towa Pharmaceutical. View them for free.

Towa Pharmaceutical certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Towa Pharmaceutical

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

Does Growth Match The Low P/E?

Towa Pharmaceutical's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 64%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 1.2% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 3.1% per annum as estimated by the five analysts watching the company. With the market predicted to deliver 9.6% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that Towa Pharmaceutical is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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 outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Towa Pharmaceutical you should be aware of, and 2 of them can't be ignored.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.