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Investors Interested In Wesdome Gold Mines Ltd.'s (TSE:WDO) Earnings

Simply Wall St
·4 mins read

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Wesdome Gold Mines Ltd.'s (TSE:WDO) price-to-earnings (or "P/E") ratio of 41.3x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, Wesdome Gold Mines has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Wesdome Gold Mines

How Does Wesdome Gold Mines' P/E Ratio Compare To Its Industry Peers?

It's plausible that Wesdome Gold Mines' particularly high P/E ratio could be a result of tendencies within its own industry. The image below shows that the Metals and Mining industry as a whole also has a P/E ratio significantly higher than the market. So this certainly goes a fair way towards explaining the company's ratio right now. In the context of the Metals and Mining industry's current setting, most of its constituents' P/E's' P/E's would be expected to be raised up greatly. However, what is happening on the company's own income statement is the most important factor to its P/E.

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Wesdome Gold Mines.

How Is Wesdome Gold Mines' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Wesdome Gold Mines' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 116%. Pleasingly, EPS has also lifted 254% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 49% per year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 24% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Wesdome Gold Mines' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Wesdome Gold Mines' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Wesdome Gold Mines that you should be aware of.

If these risks are making you reconsider your opinion on Wesdome Gold Mines, explore our interactive list of high quality stocks to get an idea of what else is out there.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.