Despite an already strong run, TriMas Corporation (NASDAQ:TRS) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 54%.
Following the firm bounce in price, TriMas' price-to-earnings (or "P/E") ratio of 40.3x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. 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.
While the market has experienced earnings growth lately, TriMas' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for TriMas
How Is TriMas' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as TriMas' is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.7%. This means it has also seen a slide in earnings over the longer-term as EPS is down 41% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 131% as estimated by the two analysts watching the company. With the market only predicted to deliver 15%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that TriMas' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
The strong share price surge has got TriMas' P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of TriMas' 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. Unless these conditions change, they will continue to provide strong support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with TriMas, and understanding should be part of your investment process.
If these risks are making you reconsider your opinion on TriMas, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.