Why Investors Shouldn't Be Surprised By AIC Mines Limited's (ASX:A1M) 27% Share Price Surge

Despite an already strong run, AIC Mines Limited (ASX:A1M) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

Since its price has surged higher, AIC Mines may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 31.5x, since almost half of all companies in Australia have P/E ratios under 21x and even P/E's lower than 12x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Recent times have been advantageous for AIC Mines as its earnings have been rising faster 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.

Check out our latest analysis for AIC Mines

Want the full picture on analyst estimates for the company? Then our free report on AIC Mines will help you uncover what's on the horizon.

Does Growth Match The High P/E?

In order to justify its P/E ratio, AIC Mines would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 59% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 86% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 48% each year as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 17% per annum growth forecast for the broader market.

With this information, we can see why AIC Mines 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 Final Word

AIC Mines shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of AIC Mines' 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - AIC Mines has 2 warning signs we think you should be aware of.

If you're unsure about the strength of AIC Mines' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.