Don’t Sell Highland Gold Mining Limited (LON:HGM) Before You Read This
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Highland Gold Mining Limited’s (LON:HGM) P/E ratio and reflect on what it tells us about the company’s share price. Highland Gold Mining has a P/E ratio of 9.2, based on the last twelve months. That means that at current prices, buyers pay £9.2 for every £1 in trailing yearly profits.
See our latest analysis for Highland Gold Mining
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 Highland Gold Mining:
P/E of 9.2 = $1.93 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.21 (Based on the year to June 2018.)
Is A High P/E 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Highland Gold Mining increased earnings per share by a whopping 89% last year. And its annual EPS growth rate over 5 years is 3.3%. With that performance, I would expect it to have an above average P/E ratio.
How Does Highland Gold Mining’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below Highland Gold Mining has a P/E ratio that is fairly close for the average for the metals and mining industry, which is 8.8.
Highland Gold Mining’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Highland Gold Mining actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Highland Gold Mining’s Balance Sheet
Highland Gold Mining has net debt worth 30% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Highland Gold Mining’s P/E Ratio
Highland Gold Mining has a P/E of 9.2. That’s below the average in the GB market, which is 14.9. The company hasn’t stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
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.
But note: Highland Gold Mining may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
