With Amgen Inc. (NASDAQ:AMGN) It Looks Like You'll Get What You Pay For

With a price-to-earnings (or "P/E") ratio of 22.2x Amgen Inc. (NASDAQ:AMGN) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

Recent times have been advantageous for Amgen as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Amgen

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

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Amgen would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 2.2% 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 climb by 11% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.0% per annum, which is noticeably less attractive.

In light of this, it's understandable that Amgen's 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 Bottom Line On Amgen's 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 Amgen maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 2 warning signs for Amgen that you need to take into consideration.

If these risks are making you reconsider your opinion on Amgen, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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