Should You Be Tempted To Sell Ross River Minerals Inc (CVE:RRM.H) Because Of Its PE Ratio?

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Ross River Minerals Inc (TSXV:RRM.H) is currently trading at a trailing P/E of 37.8x, which is higher than the industry average of 10.2x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Ross River Minerals

What you need to know about the P/E ratio

TSXV:RRM.H PE PEG Gauge Apr 18th 18
TSXV:RRM.H PE PEG Gauge Apr 18th 18

A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for RRM.H

Price-Earnings Ratio = Price per share ÷ Earnings per share

RRM.H Price-Earnings Ratio = CA$0.02 ÷ CA$0 = 37.8x

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 RRM.H, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. RRM.H’s P/E of 37.8x is higher than its industry peers (10.2x), which implies that each dollar of RRM.H’s earnings is being overvalued by investors. Therefore, according to this analysis, RRM.H is an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that RRM.H should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to RRM.H. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with RRM.H, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing RRM.H to are fairly valued by the market. If this does not hold, there is a possibility that RRM.H’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to RRM.H. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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:

  1. Financial Health: Is RRM.H’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

  2. Past Track Record: Has RRM.H 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 RRM.H’s historicals for more clarity.

  3. 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 pass 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.

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