VEEM Ltd (ASX:VEE) Looks Just Right With A 35% Price Jump

VEEM Ltd (ASX:VEE) shares have continued their recent momentum with a 35% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 4.5% isn't as impressive.

After such a large jump in price, VEEM may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 68x, since almost half of all companies in Australia have P/E ratios under 20x and even P/E's lower than 12x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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VEEM could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

VEEM's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 138% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 45% per year during the coming three years according to the two analysts following the company. With the market only predicted to deliver 17% per year, the company is positioned for a stronger earnings result.

With this information, we can see why VEEM is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On VEEM's P/E

VEEM's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that VEEM 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. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for VEEM you should know about.

If you're unsure about the strength of VEEM'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.