Despite an already strong run, Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 48%.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Ligand Pharmaceuticals' P/E ratio of 18.6x, since the median price-to-earnings (or "P/E") ratio in the United States is also close to 18x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Ligand Pharmaceuticals certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Ligand Pharmaceuticals' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 82%. The latest three year period has also seen an excellent 121% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 13% during the coming year according to the three analysts following the company. Meanwhile, the broader market is forecast to expand by 13%, which paints a poor picture.

With this information, we find it concerning that Ligand Pharmaceuticals is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Bottom Line On Ligand Pharmaceuticals' P/E

Its shares have lifted substantially and now Ligand Pharmaceuticals' P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Ligand Pharmaceuticals currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 4 warning signs for Ligand Pharmaceuticals (2 don't sit too well with us!) that you should be aware of.

You might be able to find a better investment than Ligand Pharmaceuticals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (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.

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