SilverCrest Metals Inc.'s (TSE:SIL) Shares Climb 38% But Its Business Is Yet to Catch Up

SilverCrest Metals Inc. (TSE:SIL) shares have had a really impressive month, gaining 38% after a shaky period beforehand. The last month tops off a massive increase of 130% in the last year.

Even after such a large jump in price, there still wouldn't be many who think SilverCrest Metals' price-to-earnings (or "P/E") ratio of 14.2x is worth a mention when the median P/E in Canada is similar at about 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

SilverCrest Metals certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. 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 not quite in favour.

Check out our latest analysis for SilverCrest Metals

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

How Is SilverCrest Metals' Growth Trending?

In order to justify its P/E ratio, SilverCrest Metals would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 31%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 8.3% each year during the coming three years according to the five analysts following the company. With the market predicted to deliver 10.0% growth per annum, that's a disappointing outcome.

With this information, we find it concerning that SilverCrest Metals is trading at a fairly similar P/E to the market. 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 negative growth outlook.

The Bottom Line On SilverCrest Metals' P/E

Its shares have lifted substantially and now SilverCrest Metals' P/E is also back up to the market median. 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.

We've established that SilverCrest Metals currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for SilverCrest Metals that you need to be mindful of.

You might be able to find a better investment than SilverCrest Metals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.