Northern Star Resources Limited's (ASX:NST) P/E Is On The Mark

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Northern Star Resources Limited (ASX:NST) as a stock to potentially avoid with its 28x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Northern Star Resources 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Northern Star Resources

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Northern Star Resources' to be considered reasonable.

Retrospectively, the last year delivered a decent 9.5% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 51% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 36% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

With this information, we can see why Northern Star Resources is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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 Northern Star Resources' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Northern Star Resources with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Northern Star Resources. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.