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How Does Yangarra Resources's (TSE:YGR) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Those holding Yangarra Resources (TSE:YGR) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 10% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 37% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

View our latest analysis for Yangarra Resources

Does Yangarra Resources Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 2.43 that sentiment around Yangarra Resources isn't particularly high. The image below shows that Yangarra Resources has a lower P/E than the average (10.8) P/E for companies in the oil and gas industry.

TSX:YGR Price Estimation Relative to Market, December 24th 2019

Its relatively low P/E ratio indicates that Yangarra Resources shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Yangarra Resources, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

In the last year, Yangarra Resources grew EPS like Taylor Swift grew her fan base back in 2010; the 95% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 19% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Yangarra Resources's P/E?

Yangarra Resources has net debt worth a very significant 158% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On Yangarra Resources's P/E Ratio

Yangarra Resources trades on a P/E ratio of 2.4, which is below the CA market average of 15.9. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified. What is very clear is that the market has become less pessimistic about Yangarra Resources over the last month, with the P/E ratio rising from 1.9 back then to 2.4 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.