Topaz Energy Corp.'s (TSE:TPZ) price-to-earnings (or "P/E") ratio of 31.6x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 10x and even P/E's below 4x 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.
With earnings growth that's superior to most other companies of late, Topaz Energy has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for Topaz Energy
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Topaz Energy.
What Are Growth Metrics Telling Us About The High P/E?
Topaz Energy's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 306%. The strong recent performance means it was also able to grow EPS by 1,267% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 26% over the next year. With the market only predicted to deliver 8.1%, the company is positioned for a stronger earnings result.
With this information, we can see why Topaz Energy is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
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.
As we suspected, our examination of Topaz Energy's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Topaz Energy that you should be aware of.
You might be able to find a better investment than Topaz Energy. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).