Stanmore Resources Limited's (ASX:SMR) 26% Dip In Price Shows Sentiment Is Matching Earnings

Unfortunately for some shareholders, the Stanmore Resources Limited (ASX:SMR) share price has dived 26% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 44% share price drop.

After such a large drop in price, Stanmore Resources may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.8x, since almost half of all companies in Australia have P/E ratios greater than 17x and even P/E's higher than 30x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Stanmore Resources hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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What Are Growth Metrics Telling Us About The Low P/E?

Stanmore Resources' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a frustrating 59% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 745% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 8.3% each year during the coming three years according to the four analysts following the company. That's not great when the rest of the market is expected to grow by 15% per year.

With this information, we are not surprised that Stanmore Resources is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Stanmore Resources' P/E?

Having almost fallen off a cliff, Stanmore Resources' share price has pulled its P/E way down as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Stanmore Resources maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Stanmore Resources you should be aware of, and 1 of them is significant.

If you're unsure about the strength of Stanmore Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.