Why Investors Shouldn't Be Surprised By Westgold Resources Limited's (ASX:WGX) 25% Share Price Surge

Westgold Resources Limited (ASX:WGX) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

Since its price has surged higher, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider Westgold Resources as a stock to avoid entirely with its 30.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Recent times haven't been advantageous for Westgold Resources as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Westgold Resources

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Westgold Resources.

Is There Enough Growth For Westgold Resources?

The only time you'd be truly comfortable seeing a P/E as steep as Westgold Resources' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 225% over the next year. That's shaping up to be materially higher than the 23% growth forecast for the broader market.

In light of this, it's understandable that Westgold Resources' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

The strong share price surge has got Westgold Resources' P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Westgold Resources' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Westgold Resources that you need to be mindful of.

If these risks are making you reconsider your opinion on Westgold Resources, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.