Yahoo Finance Here's What Sandstorm Gold Ltd.'s (TSE:SSL) P/E Is Telling Us
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Sandstorm Gold Ltd.'s (TSE:SSL) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Sandstorm Gold has a P/E ratio of 46.34. That corresponds to an earnings yield of approximately 2.2%.
See our latest analysis for Sandstorm Gold
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Sandstorm Gold:
P/E of 46.34 = $4.278 ÷ $0.092 (Based on the year to December 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely USD and the calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
How Does Sandstorm Gold's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (11.2) for companies in the metals and mining industry is a lot lower than Sandstorm Gold's P/E.
That means that the market expects Sandstorm Gold will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Sandstorm Gold's 188% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Regrettably, the longer term performance is poor, with EPS down 2.0% per year over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).
So What Does Sandstorm Gold's Balance Sheet Tell Us?
Net debt totals just 3.6% of Sandstorm Gold's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Sandstorm Gold's P/E Ratio
Sandstorm Gold has a P/E of 46.3. That's significantly higher than the average in its market, which is 11.6. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Sandstorm Gold. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
