Catalyst Metals Limited (ASX:CYL) Soars 55% But It's A Story Of Risk Vs Reward

Catalyst Metals Limited (ASX:CYL) shares have had a really impressive month, gaining 55% after a shaky period beforehand. The last month tops off a massive increase of 253% in the last year.

Although its price has surged higher, there still wouldn't be many who think Catalyst Metals' price-to-earnings (or "P/E") ratio of 21.5x is worth a mention when the median P/E in Australia is similar at about 20x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Recent times have been advantageous for Catalyst Metals as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Catalyst Metals

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

How Is Catalyst Metals' Growth Trending?

The only time you'd be comfortable seeing a P/E like Catalyst Metals' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 378%. The latest three year period has also seen an excellent 1,626% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 34% per year during the coming three years according to the three analysts following the company. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Catalyst Metals is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Catalyst Metals' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Catalyst Metals' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Catalyst Metals 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.