Market Participants Recognise Catalyst Pharmaceuticals, Inc.'s (NASDAQ:CPRX) Earnings

Catalyst Pharmaceuticals, Inc.'s (NASDAQ:CPRX) price-to-earnings (or "P/E") ratio of 39.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Catalyst Pharmaceuticals hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Catalyst Pharmaceuticals

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

Is There Enough Growth For Catalyst Pharmaceuticals?

The only time you'd be truly comfortable seeing a P/E as steep as Catalyst Pharmaceuticals' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 20% in total over the last three years. 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 generate growth of 42% per annum as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

With this information, we can see why Catalyst Pharmaceuticals is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Catalyst Pharmaceuticals' P/E

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 Catalyst Pharmaceuticals maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Catalyst Pharmaceuticals.

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.