With a price-to-earnings (or "P/E") ratio of 41.8x Silver Lake Resources Limited (ASX:SLR) may be sending very bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 15x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Silver Lake Resources certainly has been doing a good job lately as it's been growing earnings more 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.
Want the full picture on analyst estimates for the company? Then our free report on Silver Lake Resources will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Silver Lake Resources would need to produce outstanding growth well in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 77% last year. Pleasingly, EPS has also lifted 159% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 49% per annum over the next three years. With the market only predicted to deliver 12% each year, the company is positioned for a stronger earnings result.
With this information, we can see why Silver Lake Resources 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 Silver Lake Resources' P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Silver Lake Resources' 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.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Silver Lake Resources that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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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