Eastern Platinum Limited (TSE:ELR) Shares Fly 32% But Investors Aren't Buying For Growth

Eastern Platinum Limited (TSE:ELR) shares have had a really impressive month, gaining 32% after a shaky period beforehand. The last month tops off a massive increase of 128% in the last year.

Even after such a large jump in price, given about half the companies in Canada have price-to-earnings ratios (or "P/E's") above 16x, you may still consider Eastern Platinum as a highly attractive investment with its 3.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Eastern Platinum certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.

View our latest analysis for Eastern Platinum

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Eastern Platinum's earnings, revenue and cash flow.

Is There Any Growth For Eastern Platinum?

In order to justify its P/E ratio, Eastern Platinum would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 203% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 20% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Eastern Platinum is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Eastern Platinum's P/E

Shares in Eastern Platinum are going to need a lot more upward momentum to get the company's P/E out of its slump. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Eastern Platinum maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Eastern Platinum that you should be aware of.

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