Improved Earnings Required Before Universe Pharmaceuticals INC (NASDAQ:UPC) Shares Find Their Feet

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Universe Pharmaceuticals INC (NASDAQ:UPC) as a highly attractive investment with its 2.6x 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.

Earnings have risen firmly for Universe Pharmaceuticals recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Universe Pharmaceuticals

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Universe Pharmaceuticals' earnings, revenue and cash flow.

How Is Universe Pharmaceuticals' Growth Trending?

In order to justify its P/E ratio, Universe Pharmaceuticals would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. The latest three year period has also seen a 9.5% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.7% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Universe Pharmaceuticals is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

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.

We've established that Universe Pharmaceuticals maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Universe Pharmaceuticals (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

You might be able to find a better investment than Universe Pharmaceuticals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.