Earnings Tell The Story For Texas Pacific Land Corporation (NYSE:TPL) As Its Stock Soars 26%

Texas Pacific Land Corporation (NYSE:TPL) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

After such a large jump in price, Texas Pacific Land may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 40.7x, 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Texas Pacific Land has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, 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.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Texas Pacific Land would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 160% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 17% over the next year. With the market only predicted to deliver 12%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Texas Pacific Land's 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 Texas Pacific Land's P/E

Shares in Texas Pacific Land have built up some good momentum lately, which has really inflated its P/E. 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 Texas Pacific Land maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Texas Pacific Land with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Texas Pacific Land, 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.

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