Market Participants Recognise Genesis Minerals Limited's (ASX:GMD) Earnings Pushing Shares 26% Higher

Genesis Minerals Limited (ASX:GMD) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last month tops off a massive increase of 139% in the last year.

Since its price has surged higher, given around half the companies in Australia have price-to-earnings ratios (or "P/E's") below 20x, you may consider Genesis Minerals as a stock to potentially avoid with its 25.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Recent times have been advantageous for Genesis Minerals as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Genesis Minerals

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Genesis Minerals' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 123% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 29% per annum during the coming three years according to the ten analysts following the company. With the market only predicted to deliver 17% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Genesis Minerals' 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 Key Takeaway

Genesis Minerals shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of Genesis Minerals' 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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Genesis Minerals with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.