Graham Corporation's (NYSE:GHM) 26% Jump Shows Its Popularity With Investors

Despite an already strong run, Graham Corporation (NYSE:GHM) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 132% in the last year.

After such a large jump in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Graham as a stock to avoid entirely with its 66.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Graham certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

View our latest analysis for Graham

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Graham.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Graham's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. 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.

Looking ahead now, EPS is anticipated to climb by 31% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 16% growth forecast for the broader market.

With this information, we can see why Graham 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.

What We Can Learn From Graham's P/E?

The strong share price surge has got Graham'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.

We've established that Graham maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Graham, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.