Why We're Not Concerned Yet About Hammond Power Solutions Inc.'s (TSE:HPS.A) 32% Share Price Plunge

Hammond Power Solutions Inc. (TSE:HPS.A) shares have retraced a considerable 32% in the last month, reversing a fair amount of their solid recent performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 143%.

In spite of the heavy fall in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 13x, you may still consider Hammond Power Solutions as a stock to avoid entirely with its 22.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Hammond Power Solutions certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

How Is Hammond Power Solutions' Growth Trending?

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 6.8% gain to the company's bottom line. Pleasingly, EPS has also lifted 287% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 26% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 19% growth forecast for the broader market.

With this information, we can see why Hammond Power Solutions is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Hammond Power Solutions' shares may have retreated, but its P/E is still flying high. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Hammond Power Solutions' 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.

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.

If you're unsure about the strength of Hammond Power Solutions' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.