Hammond Power Solutions Inc. (TSE:HPS.A) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

Hammond Power Solutions Inc. (TSE:HPS.A) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 199% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Hammond Power Solutions may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26.3x, since almost half of all companies in Canada have P/E ratios under 15x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Hammond Power Solutions has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Hammond Power Solutions

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

Is There Enough Growth For Hammond Power Solutions?

Hammond Power Solutions' 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 a decent 12% gain to the company's bottom line. Pleasingly, EPS has also lifted 351% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 9.9% per year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.5% per year, which is not materially different.

In light of this, it's curious that Hammond Power Solutions' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Hammond Power Solutions' P/E

Shares in Hammond Power Solutions have built up some good momentum lately, which has really inflated its P/E. 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 Hammond Power Solutions' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Hammond Power Solutions with six simple checks will allow you to discover any risks that could be an issue.

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.