Investors Appear Satisfied With Kaiser Aluminum Corporation's (NASDAQ:KALU) Prospects As Shares Rocket 27%

Kaiser Aluminum Corporation (NASDAQ:KALU) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

After such a large jump in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Kaiser Aluminum as a stock to potentially avoid with its 21.5x 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 as high as it is.

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Recent times have been advantageous for Kaiser Aluminum 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Kaiser Aluminum

Keen to find out how analysts think Kaiser Aluminum's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Kaiser Aluminum's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 59% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 37% during the coming year according to the dual 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 Kaiser Aluminum 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

Kaiser Aluminum shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Kaiser Aluminum maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Kaiser Aluminum you should be aware of, and 1 of them is significant.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.