Capricorn Metals Ltd's (ASX:CMM) P/E Still Appears To Be Reasonable

Capricorn Metals Ltd's (ASX:CMM) price-to-earnings (or "P/E") ratio of 51.7x 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 18x 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.

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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.

View our latest analysis for Capricorn Metals

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Capricorn Metals.

Is There Enough Growth For Capricorn Metals?

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.

If we review the last year of earnings growth, the company posted a terrific increase of 300%. As a result, it also grew EPS by 27% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 74% per annum as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 15% per year growth forecast for the broader market.

In light of this, it's understandable that Capricorn Metals' 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.

The Bottom Line On Capricorn Metals' P/E

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. 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Capricorn Metals with six simple checks on some of these key factors.

If you're unsure about the strength of Capricorn Metals' 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.