Investors Appear Satisfied With Alphamin Resources Corp.'s (CVE:AFM) Prospects As Shares Rocket 26%

Alphamin Resources Corp. (CVE:AFM) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 4.3% isn't as attractive.

After such a large jump in price, Alphamin Resources' price-to-earnings (or "P/E") ratio of 17x might make it look like a sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 13x and even P/E's below 6x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Alphamin Resources has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Alphamin Resources

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Alphamin Resources would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. Still, the latest three year period has seen an excellent 614% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 49% each year as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 7.7% each year growth forecast for the broader market.

With this information, we can see why Alphamin Resources is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Alphamin Resources shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Alphamin Resources maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Alphamin Resources (including 1 which is a bit unpleasant).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.