Earnings Not Telling The Story For PermRock Royalty Trust (NYSE:PRT) After Shares Rise 27%

PermRock Royalty Trust (NYSE:PRT) shareholders have had their patience rewarded with a 27% share price jump in the last month. The annual gain comes to 175% following the latest surge, making investors sit up and take notice.

After such a large jump in price, PermRock Royalty Trust may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.6x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x 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.

PermRock Royalty Trust certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for PermRock Royalty Trust

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on PermRock Royalty Trust's earnings, revenue and cash flow.

How Is PermRock Royalty Trust's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 98%. However, this wasn't enough as the latest three year period has seen a very unpleasant 63% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's an unpleasant look.

With this information, we find it concerning that PermRock Royalty Trust is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From PermRock Royalty Trust's P/E?

PermRock Royalty Trust shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that PermRock Royalty Trust currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for PermRock Royalty Trust that you need to be mindful of.

If these risks are making you reconsider your opinion on PermRock Royalty Trust, 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.