Why Investors Shouldn't Be Surprised By Lotus Pharmaceutical Co., Ltd.'s (TWSE:1795) Low P/E

Lotus Pharmaceutical Co., Ltd.'s (TWSE:1795) price-to-earnings (or "P/E") ratio of 12.7x might make it look like a buy right now compared to the market in Taiwan, where around half of the companies have P/E ratios above 20x and even P/E's above 36x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Lotus Pharmaceutical has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Lotus Pharmaceutical

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

Is There Any Growth For Lotus Pharmaceutical?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. The strong recent performance means it was also able to grow EPS by 247% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 5.8% as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 18%, which is noticeably more attractive.

In light of this, it's understandable that Lotus Pharmaceutical's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Lotus 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Lotus Pharmaceutical with six simple checks on some of these key factors.

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.