Rocky Mountain Liquor Inc.'s (CVE:RUM) Share Price Boosted 30% But Its Business Prospects Need A Lift Too

Rocky Mountain Liquor Inc. (CVE:RUM) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 160% in the last year.

Although its price has surged higher, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 16x, you may still consider Rocky Mountain Liquor as a highly attractive investment with its 4.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

As an illustration, earnings have deteriorated at Rocky Mountain Liquor over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Rocky Mountain Liquor

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Although there are no analyst estimates available for Rocky Mountain Liquor, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Rocky Mountain Liquor's Growth Trending?

Rocky Mountain Liquor's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a frustrating 70% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 20% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Rocky Mountain Liquor's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Even after such a strong price move, Rocky Mountain Liquor's P/E still trails the rest of the market significantly. 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 Rocky Mountain Liquor maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Rocky Mountain Liquor has 4 warning signs (and 2 which are significant) we think you should know about.

You might be able to find a better investment than Rocky Mountain Liquor. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

This article by Simply Wall St is general in nature. 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.

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