Capricorn Metals Ltd (ASX:CMM) Stocks Shoot Up 28% But Its P/E Still Looks Reasonable

Capricorn Metals Ltd (ASX:CMM) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 97% in the last year.

Since its price has surged higher, Capricorn Metals may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 35.4x, since almost half of all companies in Australia have P/E ratios under 20x and even P/E's lower than 11x 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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Recent times have been advantageous for Capricorn Metals 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.

See our latest analysis for Capricorn Metals

Want the full picture on analyst estimates for the company? Then our free report on Capricorn Metals will help you uncover what's on the horizon.

How Is Capricorn Metals' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Capricorn Metals' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 60% gain to the company's bottom line. The latest three year period has also seen an excellent 43% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 49% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 17% per year, which is noticeably less attractive.

With this information, we can see why Capricorn Metals is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Capricorn Metals' P/E

The strong share price surge has got Capricorn Metals' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Capricorn Metals' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Capricorn Metals with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.