Does Richmont Mines Inc’s (TSX:RIC) PE Ratio Signal A Selling Opportunity?
Richmont Mines Inc (TSX:RIC) is currently trading at a trailing P/E of 30.4x, which is higher than the industry average of 11.1x. While this makes RIC appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Richmont Mines
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for RIC
Price-Earnings Ratio = Price per share ÷ Earnings per share
RIC Price-Earnings Ratio = 10.92 ÷ 0.359 = 30.4x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 RIC, 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. Since RIC’s P/E of 30.4x is higher than its industry peers (11.1x), it means that investors are paying more than they should for each dollar of RIC’s earnings. As such, our analysis shows that RIC represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your RIC shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to RIC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with RIC, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing RIC to are fairly valued by the market. If this does not hold true, RIC’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to RIC. 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.
Are you a potential investor? If you are considering investing in RIC, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Richmont Mines for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
To help readers see pass 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.
