Investors Appear Satisfied With Pan African Resources PLC's (LON:PAF) Prospects As Shares Rocket 25%

Pan African Resources PLC (LON:PAF) shares have continued their recent momentum with a 25% gain in the last month alone. The last month tops off a massive increase of 183% in the last year.

After such a large jump in price, Pan African Resources' price-to-earnings (or "P/E") ratio of 19.2x might make it look like a sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Recent times have been advantageous for Pan African Resources as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Pan African Resources

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pan African Resources.

Is There Enough Growth For Pan African Resources?

Pan African Resources' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 73%. The strong recent performance means it was also able to grow EPS by 79% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 42% per annum during the coming three years according to the five analysts following the company. With the market only predicted to deliver 16% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Pan African 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 Bottom Line On Pan African Resources' P/E

Pan African Resources' 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.

As we suspected, our examination of Pan African Resources' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

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

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

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.