Fab-Form Industries Ltd.'s (CVE:FBF) 33% Price Boost Is Out Of Tune With Earnings

Fab-Form Industries Ltd. (CVE:FBF) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 34% over that time.

After such a large jump in price, Fab-Form Industries may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.8x, since almost half of all companies in Canada have P/E ratios under 14x and even P/E's lower than 8x 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 as high as it is.

Our free stock report includes 2 warning signs investors should be aware of before investing in Fab-Form Industries. Read for free now.

For instance, Fab-Form Industries' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Fab-Form Industries

Although there are no analyst estimates available for Fab-Form Industries, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Fab-Form Industries' Growth Trending?

Fab-Form Industries' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. As a result, earnings from three years ago have also fallen 11% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Fab-Form Industries is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Fab-Form Industries' P/E

Fab-Form Industries' P/E is getting right up there since its shares have risen strongly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Fab-Form Industries currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Fab-Form Industries (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Fab-Form Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.