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Supernus Pharmaceuticals (NASDAQ:SUPN) shareholders are no doubt pleased to see that the share price has had a great month, posting a 31% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 36% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
How Does Supernus Pharmaceuticals's P/E Ratio Compare To Its Peers?
Supernus Pharmaceuticals's P/E of 10.93 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Supernus Pharmaceuticals has a lower P/E than the average (21.7) in the pharmaceuticals industry classification.
Its relatively low P/E ratio indicates that Supernus Pharmaceuticals shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Supernus Pharmaceuticals, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Supernus Pharmaceuticals's earnings per share were pretty steady over the last year. But over the longer term (3 years), earnings per share have increased by 5.4%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Supernus Pharmaceuticals's P/E?
Since Supernus Pharmaceuticals holds net cash of US$1.9m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Supernus Pharmaceuticals's P/E Ratio
Supernus Pharmaceuticals trades on a P/E ratio of 10.9, which is below the US market average of 14.9. EPS was up modestly better over the last twelve months. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. What we know for sure is that investors have become more excited about Supernus Pharmaceuticals recently, since they have pushed its P/E ratio from 8.3 to 10.9 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Supernus Pharmaceuticals. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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