Pinetree Capital Ltd. (TSE:PNP) Soars 27% But It's A Story Of Risk Vs Reward

Pinetree Capital Ltd. (TSE:PNP) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 197% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Pinetree Capital may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.9x, since almost half of all companies in Canada have P/E ratios greater than 15x and even P/E's higher than 32x are not unusual. 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.

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.

See our latest analysis for Pinetree Capital

Although there are no analyst estimates available for Pinetree Capital, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Pinetree Capital's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 291% gain to the company's bottom line. Pleasingly, EPS has also lifted 214% 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.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially lower than the company's recent medium-term annualised growth rates.

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 Key Takeaway

Pinetree Capital's recent share price jump still sees its P/E sitting firmly flat on the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Pinetree Capital currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Pinetree Capital (1 makes us a bit uncomfortable!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Pinetree Capital, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.