Yahoo Finance Does Pistol Bay Mining Inc’s (CVE:PST) PE Ratio Warrant A Buy?
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Pistol Bay Mining Inc (CVE:PST) trades with a trailing P/E of 1.4x, which is lower than the industry average of 9.3x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for Pistol Bay Mining
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for PST
Price-Earnings Ratio = Price per share ÷ Earnings per share
PST Price-Earnings Ratio = CA$0.060 ÷ CA$0.0416 = 1.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PST, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. PST’s P/E of 1.4 is lower than its industry peers (9.3), which implies that each dollar of PST’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Metals and Mining companies in CA including Winston Resources, Sulliden Mining Capital and European Electric Metals. One could put it like this: the market is pricing PST as if it is a weaker company than the average company in its industry.
A few caveats
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to PST, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with PST, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing PST to are fairly valued by the market. If this does not hold, there is a possibility that PST’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to PST. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for PST’s future growth? Take a look at our free research report of analyst consensus for PST’s outlook.
Past Track Record: Has PST been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of PST’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
