Subdued Growth No Barrier To Rocky Mountain Liquor Inc. (CVE:RUM) With Shares Advancing 26%

Rocky Mountain Liquor Inc. (CVE:RUM) shares have continued their recent momentum with a 26% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

Following the firm bounce in price, Rocky Mountain Liquor's price-to-earnings (or "P/E") ratio of 21.1x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Rocky Mountain Liquor's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Rocky Mountain Liquor

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 Rocky Mountain Liquor's earnings, revenue and cash flow.

Is There Enough Growth For Rocky Mountain Liquor?

In order to justify its P/E ratio, Rocky Mountain Liquor would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 47%. This means it has also seen a slide in earnings over the longer-term as EPS is down 80% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Rocky Mountain Liquor's P/E sits above the majority of other companies. 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 very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Rocky Mountain Liquor's P/E?

Rocky Mountain Liquor'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.

We've established that Rocky Mountain Liquor currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 3 warning signs for Rocky Mountain Liquor (2 are potentially serious!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.