Earnings Not Telling The Story For REX American Resources Corporation (NYSE:REX) After Shares Rise 27%

REX American Resources Corporation (NYSE:REX) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last month tops off a massive increase of 100% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about REX American Resources' P/E ratio of 16.4x, since the median price-to-earnings (or "P/E") ratio in the United States is also close to 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With its earnings growth in positive territory compared to the declining earnings of most other companies, REX American Resources has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for REX American Resources

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Does Growth Match The P/E?

In order to justify its P/E ratio, REX American Resources would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 122% last year. The strong recent performance means it was also able to grow EPS by 3,326% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 49% during the coming year according to the lone analyst following the company. That's not great when the rest of the market is expected to grow by 11%.

In light of this, it's somewhat alarming that REX American Resources' P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

REX American Resources' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of REX American Resources' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with REX American Resources, and understanding these should be part of your investment process.

If you're unsure about the strength of REX American Resources' 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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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.