Is Gold Resource Corporation (NYSEMKT:GORO) Attractive At This PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance.
Gold Resource Corporation (NYSEMKT:GORO) is trading with a trailing P/E of 36.3, which is higher than the industry average of 13.9. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for Gold Resource
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for GORO
Price-Earnings Ratio = Price per share ÷ Earnings per share
GORO Price-Earnings Ratio = $5.16 ÷ $0.142 = 36.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as GORO, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 36.3, GORO’s P/E is higher than its industry peers (13.9). This implies that investors are overvaluing each dollar of GORO’s earnings. This multiple is a median of profitable companies of 25 Metals and Mining companies in US including North American Potash Developments, European Electric Metals and Sherritt International. You could think of it like this: the market is pricing GORO as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to GORO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Gold Resource Corporation is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with GORO are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
Since you may have already conducted your due diligence on GORO, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for GORO’s future growth? Take a look at our free research report of analyst consensus for GORO’s outlook.
Past Track Record: Has GORO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GORO’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
