Investors Appear Satisfied With HMC Capital Limited's (ASX:HMC) Prospects As Shares Rocket 35%

The HMC Capital Limited (ASX:HMC) share price has done very well over the last month, posting an excellent gain of 35%. The annual gain comes to 143% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, HMC Capital's price-to-earnings (or "P/E") ratio of 59.3x might make it look like a strong sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 19x and even P/E's below 11x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's inferior to most other companies of late, HMC Capital has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for HMC Capital

Keen to find out how analysts think HMC Capital's future stacks up against the industry? In that case, our free report is a great place to start.

How Is HMC Capital's Growth Trending?

HMC Capital'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.

If we review the last year of earnings growth, the company posted a worthy increase of 2.8%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 34% per year over the next three years. With the market only predicted to deliver 18% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that HMC Capital's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From HMC Capital's P/E?

HMC Capital'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 HMC Capital 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for HMC Capital that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.