Earnings Not Telling The Story For Cronos Australia Limited (ASX:CAU) After Shares Rise 111%

Despite an already strong run, Cronos Australia Limited (ASX:CAU) shares have been powering on, with a gain of 111% in the last thirty days. The last 30 days were the cherry on top of the stock's 385% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 14x, you may consider Cronos Australia as a stock to avoid entirely with its 60.4x P/E ratio. 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.

Cronos Australia 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Cronos Australia

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 Cronos Australia's earnings, revenue and cash flow.

How Is Cronos Australia's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Cronos Australia's 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 253%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

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

With this information, we find it concerning that Cronos Australia is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Cronos Australia's P/E?

Cronos Australia's P/E is flying high just like its stock has during the last month. 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.

Our examination of Cronos Australia revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely 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.

Before you settle on your opinion, we've discovered 2 warning signs for Cronos Australia (1 makes us a bit uncomfortable!) that you should be aware of.

You might be able to find a better investment than Cronos Australia. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.