Why Investors Shouldn't Be Surprised By Solaris Energy Infrastructure, Inc.'s (NYSE:SEI) 29% Share Price Surge

Solaris Energy Infrastructure, Inc. (NYSE:SEI) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 102% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Solaris Energy Infrastructure may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 42.3x, since almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, Solaris Energy Infrastructure's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Solaris Energy Infrastructure

Keen to find out how analysts think Solaris Energy Infrastructure's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Solaris Energy Infrastructure?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 42%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 90% during the coming year according to the lone analyst following the company. 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 Solaris Energy Infrastructure's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Solaris Energy Infrastructure's P/E

The strong share price surge has got Solaris Energy Infrastructure's P/E rushing to great heights as well. 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 Solaris Energy Infrastructure's 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. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Solaris Energy Infrastructure (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of Solaris Energy Infrastructure's 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.