Capricorn Metals Ltd’s (ASX:CMM) price-to-earnings (or “P/E”) ratio of 22.2x might make it look like a sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 15x and even P/E’s below 8x are quite common. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s lofty.
Recent times have been advantageous for Capricorn Metals as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
View our latest analysis for Capricorn Metals
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Is There Enough Growth For Capricorn Metals?
Capricorn Metals’ P/E ratio would be typical for a company that’s expected to deliver solid growth, and importantly, perform better than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Although, its longer-term performance hasn’t been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 18% per annum over the next three years. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.
With this information, we can see why Capricorn Metals is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Capricorn Metals’ P/E?
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 Capricorn Metals’ 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.
Don’t forget that there may be other risks. For instance, we’ve identified 1 warning sign for Capricorn Metals that you should be aware of.
If these risks are making you reconsider your opinion on Capricorn Metals, explore our interactive list of high quality stocks to get an idea of what else is out there.
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.
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