Why Investors Shouldn't Be Surprised By CEMATRIX Corporation's (TSE:CEMX) 29% Share Price Surge

CEMATRIX Corporation (TSE:CEMX) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 36%.

Following the firm bounce in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may consider CEMATRIX as a stock to avoid entirely with its 28.5x 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 lofty.

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CEMATRIX hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for CEMATRIX

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

Is There Enough Growth For CEMATRIX?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 36%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 97% as estimated by the lone analyst watching the company. With the market only predicted to deliver 18%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that CEMATRIX'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 CEMATRIX's P/E

CEMATRIX's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of CEMATRIX's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for CEMATRIX that you should be aware of.

Of course, you might also be able to find a better stock than CEMATRIX. 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.