DPM Metals Inc. (TSE:DPM) Looks Just Right With A 30% Price Jump

Despite an already strong run, DPM Metals Inc. (TSE:DPM) shares have been powering on, with a gain of 30% in the last thirty days. The last month tops off a massive increase of 197% in the last year.

Since its price has surged higher, DPM Metals' price-to-earnings (or "P/E") ratio of 20.7x 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 16x and even P/E's below 9x 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.

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Recent times have been advantageous for DPM Metals 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 DPM Metals

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Is There Enough Growth For DPM Metals?

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

Retrospectively, the last year delivered an exceptional 48% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 373% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 27% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 11% each year, which is noticeably less attractive.

With this information, we can see why DPM Metals is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On DPM Metals' P/E

DPM Metals' P/E is getting right up there since its shares have risen strongly. 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.

As we suspected, our examination of DPM Metals' 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.

You always need to take note of risks, for example - DPM Metals has 1 warning sign we think you should be aware of.

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