Zimplats Holdings Limited's (ASX:ZIM) 27% Share Price Surge Not Quite Adding Up

Despite an already strong run, Zimplats Holdings Limited (ASX:ZIM) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Following the firm bounce in price, Zimplats Holdings' price-to-earnings (or "P/E") ratio of 35x 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 21x and even P/E's below 12x are quite common. 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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Zimplats Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Zimplats Holdings

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 Zimplats Holdings' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

Zimplats Holdings' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 393% gain to the company's bottom line. Still, incredibly EPS has fallen 89% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Zimplats Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Zimplats Holdings' P/E?

The strong share price surge has got Zimplats Holdings' P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Zimplats Holdings revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about this 1 warning sign we've spotted with Zimplats Holdings.

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.