A Piece Of The Puzzle Missing From Pinetree Capital Ltd.'s (TSE:PNP) 28% Share Price Climb

Pinetree Capital Ltd. (TSE:PNP) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 192% in the last year.

Although its price has surged higher, given about half the companies in Canada have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Pinetree Capital as a highly attractive investment with its 4.8x 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 limited.

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With earnings growth that's exceedingly strong of late, Pinetree Capital has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Pinetree Capital

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 Pinetree Capital's earnings, revenue and cash flow.

Is There Any Growth For Pinetree Capital?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Pinetree Capital's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 462%. Pleasingly, EPS has also lifted 1,698% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

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

With this information, we find it odd that Pinetree Capital is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Pinetree Capital's P/E

Shares in Pinetree Capital are going to need a lot more upward momentum to get the company's P/E out of its slump. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Pinetree Capital revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Having said that, be aware Pinetree Capital is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

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.