Why Investors Shouldn't Be Surprised By Topaz Energy Corp.'s (TSE:TPZ) P/E

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 14x, you may consider Topaz Energy Corp. (TSE:TPZ) as a stock to avoid entirely with its 69.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Topaz Energy has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Topaz Energy

Keen to find out how analysts think Topaz Energy's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Topaz Energy?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 52%. Even so, admirably EPS has lifted 222% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 22% per year during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 7.8% per annum growth forecast for the broader market.

In light of this, it's understandable that Topaz Energy's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Topaz Energy's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Topaz Energy maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

It is also worth noting that we have found 2 warning signs for Topaz Energy that you need to take into consideration.

If you're unsure about the strength of Topaz Energy's 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.