Market Participants Recognise Vysarn Limited's (ASX:VYS) Earnings Pushing Shares 29% Higher

Vysarn Limited (ASX:VYS) shares have continued their recent momentum with a 29% gain in the last month alone. The last month tops off a massive increase of 159% in the last year.

Following the firm bounce in price, Vysarn's price-to-earnings (or "P/E") ratio of 26.6x might make it look like a 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Vysarn certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Vysarn

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Vysarn's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Vysarn would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 100% last year. The strong recent performance means it was also able to grow EPS by 2,034% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 26% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

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

What We Can Learn From Vysarn's P/E?

Vysarn shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Vysarn maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Vysarn that you need to be mindful of.

Of course, you might also be able to find a better stock than Vysarn. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.