Further Upside For Canaf Investments Inc. (CVE:CAF) Shares Could Introduce Price Risks After 29% Bounce

Despite an already strong run, Canaf Investments Inc. (CVE:CAF) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 107% in the last year.

Although its price has surged higher, Canaf Investments may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6x, since almost half of all companies in Canada have P/E ratios greater than 16x and even P/E's higher than 32x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Canaf Investments certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Canaf Investments

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Canaf Investments will help you shine a light on its historical performance.

How Is Canaf Investments' Growth Trending?

Canaf Investments' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 46% last year. The strong recent performance means it was also able to grow EPS by 126% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 29% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

With this information, we find it odd that Canaf Investments is trading at a P/E lower than the market. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

What We Can Learn From Canaf Investments' P/E?

Shares in Canaf Investments are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

Our examination of Canaf Investments revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 1 warning sign for Canaf Investments that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.