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Despite an already strong run, Supremex Inc. (TSE:SXP) shares have been powering on, with a gain of 27% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.
Although its price has surged higher, Supremex's price-to-earnings (or "P/E") ratio of 9.2x might still make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 17x and even P/E's above 37x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Supremex has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.
Check out our latest analysis for Supremex
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How Is Supremex's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Supremex's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.1% last year. Still, lamentably EPS has fallen 39% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we are not surprised that Supremex is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
The Key Takeaway
Despite Supremex's shares building up a head of steam, its P/E still lags most other companies. 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.