Yahoo Finance A Sliding Share Price Has Us Looking At Lucara Diamond Corp.'s (TSE:LUC) P/E Ratio
Unfortunately for some shareholders, the Lucara Diamond (TSE:LUC) share price has dived 32% in the last thirty days. Given the 65% drop over the last year, some shareholders might be worried that they have become bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Lucara Diamond
Does Lucara Diamond Have A Relatively High Or Low P/E For Its Industry?
Lucara Diamond has a P/E ratio of 13.09. You can see in the image below that the average P/E (13.3) for companies in the metals and mining industry is roughly the same as Lucara Diamond's P/E.
That indicates that the market expects Lucara Diamond will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Lucara Diamond increased earnings per share by 8.4% last year. In contrast, EPS has decreased by 24%, annually, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).
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).
Lucara Diamond's Balance Sheet
Since Lucara Diamond holds net cash of US$11m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Lucara Diamond's P/E Ratio
Lucara Diamond trades on a P/E ratio of 13.1, which is fairly close to the CA market average of 13.6. Earnings improved over the last year. And the net cash position gives the company many options. The average P/E suggests the market isn't overly optimistic, though. What can be absolutely certain is that the market has become significantly less optimistic about Lucara Diamond over the last month, with the P/E ratio falling from 19.3 back then to 13.1 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Lucara Diamond. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
