CECO Environmental Corp.'s (NASDAQ:CECO) Shares Climb 56% But Its Business Is Yet to Catch Up

Despite an already strong run, CECO Environmental Corp. (NASDAQ:CECO) shares have been powering on, with a gain of 56% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 58% in the last year.

After such a large jump in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider CECO Environmental as a stock to avoid entirely with its 30.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With earnings growth that's superior to most other companies of late, CECO Environmental has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For CECO Environmental?

The only time you'd be truly comfortable seeing a P/E as steep as CECO Environmental's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 295% last year. Pleasingly, EPS has also lifted 631% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 3.9% per annum during the coming three years according to the six analysts following the company. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader market.

In light of this, it's alarming that CECO Environmental's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From CECO Environmental's P/E?

The strong share price surge has got CECO Environmental's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that CECO Environmental currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with CECO Environmental (at least 2 which are a bit concerning), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on CECO Environmental, 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.