After Leaping 40% 5N Plus Inc. (TSE:VNP) Shares Are Not Flying Under The Radar

5N Plus Inc. (TSE:VNP) shareholders are no doubt pleased to see that the share price has bounced 40% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 45%.

Since its price has surged higher, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 14x, you may consider 5N Plus as a stock to avoid entirely with its 32.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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5N Plus hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for 5N Plus

Want the full picture on analyst estimates for the company? Then our free report on 5N Plus will help you uncover what's on the horizon.

How Is 5N Plus' Growth Trending?

In order to justify its P/E ratio, 5N Plus would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.1%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 338% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 58% as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 21% growth forecast for the broader market.

With this information, we can see why 5N Plus 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 Final Word

Shares in 5N Plus have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that 5N Plus maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for 5N Plus (of which 1 can't be ignored!) you should know about.

You might be able to find a better investment than 5N Plus. 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.