Is Majestic Gold Corp.'s (CVE:MJS) P/E Ratio Really That Good?
Of late the Majestic Gold (CVE:MJS) share price has softened like an ice cream in the sun, melting a full . Even longer term holders have taken a real hit with the stock declining 29% in the last year. But those shareholders who nailed the timing of their purchase will be quite happy; the stock has gained 11% in the last 90 days.
All else being equal, a sharp share price increase should make a stock less 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business 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 Majestic Gold
Does Majestic Gold Have A Relatively High Or Low P/E For Its Industry?
Majestic Gold's P/E of 7.76 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Majestic Gold has a lower P/E than the average (15.3) in the metals and mining industry classification.
This suggests that market participants think Majestic Gold will underperform other companies in its industry. Since the market seems unimpressed with Majestic 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. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Majestic Gold's earnings per share grew by -5.6% in the last twelve months.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Majestic Gold's Balance Sheet
With net cash of US$7.8m, Majestic Gold has a very strong balance sheet, which may be important for its business. Having said that, at 20% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Majestic Gold's P/E Ratio
Majestic Gold trades on a P/E ratio of 7.8, which is below the CA market average of 15.0. Recent earnings growth wasn't bad. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don't think it will. Given Majestic Gold's P/E ratio has declined from 7.8 to 7.8 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 invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. 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 you might want to assess this data-rich visualization 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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