Shareholders Should Be Pleased With Neurocrine Biosciences, Inc.'s (NASDAQ:NBIX) Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Neurocrine Biosciences, Inc. (NASDAQ:NBIX) as a stock to avoid entirely with its 33.6x 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.

Neurocrine Biosciences 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 Neurocrine Biosciences

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

How Is Neurocrine Biosciences' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 96%. However, this wasn't enough as the latest three year period has seen a very unpleasant 19% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 38% each year over the next three years. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.

In light of this, it's understandable that Neurocrine Biosciences' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of Neurocrine Biosciences' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Neurocrine Biosciences you should be aware of.

If you're unsure about the strength of Neurocrine Biosciences' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.