Investors Appear Satisfied With 5N Plus Inc.'s (TSE:VNP) Prospects As Shares Rocket 27%

5N Plus Inc. (TSE:VNP) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last month tops off a massive increase of 122% in the last year.

Following the firm bounce in price, 5N Plus' price-to-earnings (or "P/E") ratio of 30.7x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 14x and even P/E's below 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

5N Plus certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. 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.

Retrospectively, the last year delivered an exceptional 220% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 38% during the coming year according to the five analysts following the company. With the market only predicted to deliver 23%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that 5N Plus' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From 5N Plus' P/E?

The strong share price surge has got 5N Plus' P/E rushing to great heights as well. 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.

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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for 5N Plus that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.