Total Telcom Inc. (CVE:TTZ) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Total Telcom Inc. (CVE:TTZ) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 33% in the last twelve months.

Following the firm bounce in price, Total Telcom may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.2x, since almost half of all companies in Canada have P/E ratios under 14x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

As an illustration, earnings have deteriorated at Total Telcom over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough 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 Total Telcom

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

How Is Total Telcom's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Total Telcom's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 48% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

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

In light of this, it's alarming that Total Telcom's P/E sits above the majority of other companies. 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 Bottom Line On Total Telcom's P/E

Total Telcom's 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.

Our examination of Total Telcom revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Total Telcom (of which 1 is a bit unpleasant!) you should know about.

If you're unsure about the strength of Total Telcom's 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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