With a price/earnings ratio (or “P/E”) of 42x Royal Pharma plc (NASDAQ:RPRX) may be sending very bearish signals right now, given that nearly half of all companies in the US have P/E ratios below 16x and even P/Es below 9x are not not unusual. Although it is not wise to take the P/E at face value as there may be an explanation why it is so high.
With earnings growth lagging behind most other companies lately, Royalty Pharma has been relatively slow. Many may expect the uninspiring earnings performance to recover significantly, which has kept the P/E from crashing. If not, existing shareholders could be very concerned about the viability of the share price.
See our latest analysis for Royalty Pharma
Want to know how analysts think the future of Royalty Pharma compares to that of the industry? In this case our free report is an excellent starting point.
Does the growth match the high P/E?
Royalty Pharma’s P/E ratio would be typical of a company that is expected to generate very strong growth and, above all, much better than the market.
Looking back first, we see that the company managed to increase its earnings per share by 13% last year. However, that wasn’t enough, as the last three-year period saw an unpleasant 97% overall drop in EPS. As a result, shareholders would have been disappointed with medium-term earnings growth rates.
Looking ahead, EPS is expected to climb 105% in the coming year according to the five analysts who track the company. Meanwhile, the rest of the market is only expected to grow by 9.1%, which is significantly less attractive.
In light of this, it’s understandable that Royalty Pharma’s P/E sits above the majority of other companies. It seems that most investors expect this strong future growth and are willing to pay more for the stock.
What can we learn from the P/E of Royalty Pharma?
As a general rule, we would caution against reading price-earnings ratios too broadly when making investment decisions, even though it can reveal a lot about what other market participants think of the company.
As we suspected, our review of analyst forecasts for Royalty Pharma revealed that its better earnings outlook is contributing to its high P/E. At this point, investors believe that the potential for earnings deterioration is not large enough to warrant a lower P/E ratio. Unless these conditions change, they will continue to provide strong support for the stock price.
That said, know Royalty Pharma shows 3 warning signs in our investment analysis, you should know.
If these the risks make you reconsider your opinion of Royalty Pharmaexplore our interactive list of high-quality stocks to get an idea of what else is out there.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.