Earnings Tell The Story For Aris Water Solutions, Inc. (NYSE:ARIS) As Its Stock Soars 29%

Aris Water Solutions, Inc. (NYSE:ARIS) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 158% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Aris Water Solutions' price-to-earnings (or "P/E") ratio of 26.9x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Aris Water Solutions has been doing relatively well. 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.

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Is There Enough Growth For Aris Water Solutions?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 71% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 37% over the next year. With the market only predicted to deliver 15%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Aris Water Solutions' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Aris Water Solutions' P/E

Aris Water Solutions' P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Aris Water Solutions' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Aris Water Solutions (1 is concerning) you should be aware of.

If these risks are making you reconsider your opinion on Aris Water Solutions, 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.