Investors Appear Satisfied With GenusPlus Group Ltd's (ASX:GNP) Prospects As Shares Rocket 27%

GenusPlus Group Ltd (ASX:GNP) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 106% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, GenusPlus Group may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 32.1x, since almost half of all companies in Australia have P/E ratios under 18x and even P/E's lower than 10x 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 so lofty.

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GenusPlus Group certainly has been doing a good job lately as it's been growing earnings more 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.

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Is There Enough Growth For GenusPlus Group?

In order to justify its P/E ratio, GenusPlus Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 48% gain to the company's bottom line. The latest three year period has also seen a 22% 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.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 20% each year over the next three years. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that GenusPlus Group'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.

What We Can Learn From GenusPlus Group's P/E?

The strong share price surge has got GenusPlus Group's P/E rushing to great heights as well. 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 GenusPlus Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for GenusPlus Group you should be aware of.

If you're unsure about the strength of GenusPlus Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.