Why Investors Shouldn't Be Surprised By Texas Pacific Land Corporation's (NYSE:TPL) 34% Share Price Surge

Texas Pacific Land Corporation (NYSE:TPL) shareholders have had their patience rewarded with a 34% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 69%.

Following the firm bounce in price, Texas Pacific Land's price-to-earnings (or "P/E") ratio of 54.3x might make it look like a strong 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 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Texas Pacific Land recently, which is pleasing to see. It might be that many expect the respectable 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 may be a little nervous about the viability of the share price.

See our latest analysis for Texas Pacific Land

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Texas Pacific Land will help you shine a light on its historical performance.

Is There Enough Growth For Texas Pacific Land?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Texas Pacific Land's to be considered reasonable.

Retrospectively, the last year delivered a decent 7.9% gain to the company's bottom line. The latest three year period has also seen an excellent 129% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 14% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's understandable that Texas Pacific Land's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Texas Pacific Land's P/E

The strong share price surge has got Texas Pacific Land's P/E rushing to great heights as well. 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.

As we suspected, our examination of Texas Pacific Land revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. 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 you're unsure about the strength of Texas Pacific Land's 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.