Subdued Growth No Barrier To Silvercorp Metals Inc. (TSE:SVM) With Shares Advancing 30%

Silvercorp Metals Inc. (TSE:SVM) shareholders have had their patience rewarded with a 30% share price jump in the last month. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in Canada have price-to-earnings ratios (or "P/E's") below 15x, you may consider Silvercorp Metals as a stock to potentially avoid with its 20.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Silvercorp Metals as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Silvercorp Metals

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Silvercorp Metals' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 149% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 8.0% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 3.9% over the next year. With the market predicted to deliver 26% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Silvercorp Metals' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Silvercorp Metals' P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Silvercorp Metals currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Silvercorp Metals that you need to be mindful of.

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