Should You Be Tempted To Sell Wesdome Gold Mines Ltd (TSE:WDO) At Its Current PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Wesdome Gold Mines Ltd (TSE:WDO)’s fundamentals and stock market performance.
Wesdome Gold Mines Ltd (TSE:WDO) is trading with a trailing P/E of 115.9x, which is higher than the industry average of 11.2x. While this makes WDO appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Wesdome Gold Mines
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for WDO
Price-Earnings Ratio = Price per share ÷ Earnings per share
WDO Price-Earnings Ratio = CA$2.99 ÷ CA$0.0258 = 115.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to WDO, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 115.9x, WDO’s P/E is higher than its industry peers (11.2x). This implies that investors are overvaluing each dollar of WDO’s earnings. As such, our analysis shows that WDO represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your WDO shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to WDO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with WDO, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing WDO to are fairly valued by the market. If this does not hold, there is a possibility that WDO’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 WDO. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for WDO’s future growth? Take a look at our free research report of analyst consensus for WDO’s outlook.
Past Track Record: Has WDO 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 WDO’s historicals for more clarity.
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.
