Yahoo Finance How Does Trans-Siberian Gold's (LON:TSG) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Trans-Siberian Gold (LON:TSG) shares are down a considerable 39% in the last month. Indeed, the recent drop has reduced the annual gain to a relatively sedate 6.8% over the last twelve months.
All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
See our latest analysis for Trans-Siberian Gold
Does Trans-Siberian Gold Have A Relatively High Or Low P/E For Its Industry?
Trans-Siberian Gold's P/E of 4.23 indicates relatively low sentiment towards the stock. The image below shows that Trans-Siberian Gold has a lower P/E than the average (9.0) P/E for companies in the metals and mining industry.
This suggests that market participants think Trans-Siberian Gold will underperform other companies in its industry. Since the market seems unimpressed with Trans-Siberian Gold, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Trans-Siberian Gold's earnings made like a rocket, taking off 217% last year. Even better, EPS is up 31% per year over three years. So you might say it really deserves to have an above-average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Trans-Siberian Gold's Balance Sheet
Trans-Siberian Gold has net debt worth 18% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Bottom Line On Trans-Siberian Gold's P/E Ratio
Trans-Siberian Gold has a P/E of 4.2. That's below the average in the GB market, which is 18.1. The company hasn't stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given Trans-Siberian Gold's P/E ratio has declined from 6.9 to 4.2 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
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 modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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