Trench Metals Corp. (CVE:TMC) May Have Run Too Fast Too Soon With Recent 35% Price Plummet

Trench Metals Corp. (CVE:TMC) shareholders that were waiting for something to happen have been dealt a blow with a 35% share price drop in the last month. The good news is that in the last year, the stock has shone bright like a diamond, gaining 118%.

Even after such a large drop in price, Trench Metals may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 25.7x, since almost half of all companies in Canada have P/E ratios under 15x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

It looks like earnings growth has deserted Trench Metals recently, which is not something to boast about. One possibility is that the P/E is high because investors think the benign earnings growth will improve to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Trench Metals

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

How Is Trench Metals' Growth Trending?

Trench Metals' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

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

With this information, we find it concerning that Trench Metals is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Even after such a strong price drop, Trench Metals' P/E still exceeds the rest of the market significantly. 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 Trench Metals currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely 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 4 warning signs with Trench Metals (at least 2 which are potentially serious), and understanding them should be part of your investment process.

If you're unsure about the strength of Trench Metals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. 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.
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