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When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 15x, you may consider Saracen Mineral Holdings Limited (ASX:SAR) as a stock to avoid entirely with its 44.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Saracen Mineral Holdings as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
Does Saracen Mineral Holdings Have A Relatively High Or Low P/E For Its Industry?
It's plausible that Saracen Mineral Holdings' particularly high P/E ratio could be a result of tendencies within its own industry. It turns out the Metals and Mining industry in general has a P/E ratio lower than the market, as the graphic below shows. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. Some industry P/E's don't move around a lot and right now most companies within the Metals and Mining industry should be getting stifled. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Saracen Mineral Holdings.
How Is Saracen Mineral Holdings' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Saracen Mineral Holdings' is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 57% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 239% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 33% each year during the coming three years according to the ten analysts following the company. With the market only predicted to deliver 12% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why Saracen Mineral Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Saracen Mineral Holdings' P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Saracen Mineral Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You always need to take note of risks, for example - Saracen Mineral Holdings has 2 warning signs we think you should be aware of.
You might be able to find a better investment than Saracen Mineral Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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.
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