Keyera Corp.'s (TSE:KEY) Shares May Have Run Too Fast Too Soon

Keyera Corp.'s (TSE:KEY) price-to-earnings (or "P/E") ratio of 21.5x might make it look like a sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 14x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been advantageous for Keyera as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Keyera

Want the full picture on analyst estimates for the company? Then our free report on Keyera will help you uncover what's on the horizon.

How Is Keyera's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Keyera's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 51% gain to the company's bottom line. The latest three year period has also seen an excellent 170% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.0% each year during the coming three years according to the five analysts following the company. With the market predicted to deliver 11% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Keyera's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Keyera's P/E

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 Keyera currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for Keyera you should be aware of.

Of course, you might also be able to find a better stock than Keyera. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.