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A Sliding Share Price Has Us Looking At Kirkland Lake Gold Ltd.'s (TSE:KL) P/E Ratio

Simply Wall St

To the annoyance of some shareholders, Kirkland Lake Gold (TSE:KL) shares are down a considerable 34% in the last month. The recent drop has obliterated the annual return, with the share price now down 28% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Kirkland Lake Gold

How Does Kirkland Lake Gold's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 8.58 that sentiment around Kirkland Lake Gold isn't particularly high. If you look at the image below, you can see Kirkland Lake Gold has a lower P/E than the average (9.6) in the metals and mining industry classification.

TSX:KL Price Estimation Relative to Market, March 14th 2020

Its relatively low P/E ratio indicates that Kirkland Lake Gold shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, Kirkland Lake Gold grew EPS like Taylor Swift grew her fan base back in 2010; the 105% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 86% is also impressive. So I'd be surprised if the P/E ratio was not above average.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

How Does Kirkland Lake Gold's Debt Impact Its P/E Ratio?

Kirkland Lake Gold has net cash of US$707m. This is fairly high at 11% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Kirkland Lake Gold's P/E Ratio

Kirkland Lake Gold's P/E is 8.6 which is below average (11.9) in the CA market. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. One might conclude that the market is a bit pessimistic, given the low P/E ratio. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer Given Kirkland Lake Gold's P/E ratio has declined from 13.1 to 8.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Kirkland Lake Gold. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.