Investor Optimism Abounds Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 35.5x Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 11x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Supernus Pharmaceuticals certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Supernus Pharmaceuticals?

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

If we review the last year of earnings growth, the company posted a terrific increase of 131%. However, this wasn't enough as the latest three year period has seen a very unpleasant 30% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 1.7% each year during the coming three years according to the five analysts following the company. Meanwhile, the broader market is forecast to expand by 10% each year, which paints a poor picture.

With this information, we find it concerning that Supernus Pharmaceuticals is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From Supernus Pharmaceuticals' 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.

We've established that Supernus Pharmaceuticals currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Supernus Pharmaceuticals with six simple checks on some of these key factors.

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.