The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Cerro Grande Mining Corporation (CNSX:CEG)’s fundamentals and stock market performance.
Cerro Grande Mining Corporation (CNSX:CEG) is currently trading at a trailing P/E of 0.6x, which is lower than the industry average of 10.5x. While CEG might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Cerro Grande Mining
Breaking down 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for CEG
Price per share = $0.0038
Earnings per share = $0.00622
∴ Price-Earnings Ratio = $0.0038 ÷ $0.00622 = 0.6x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CEG, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
Since CEG’s P/E of 0.6x is lower than its industry peers (10.5x), it means that investors are paying less than they should for each dollar of CEG’s earnings. This multiple is a median of profitable companies of 25 Metals and Mining companies in CA including Knick Exploration, Winston Resources and Stelco Holdings. Therefore, according to this analysis, CEG is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy CEG immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to CEG. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with CEG, then investors would naturally value CEG at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with CEG, investors would also value CEG at a lower price since it is a lower growth investment. Both scenarios would explain why CEG has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing CEG to are fairly valued by the market. If this does not hold, there is a possibility that CEG’s P/E is lower because firms in our peer group are being 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 undervaluation could signal a good buying opportunity to increase your exposure to CEG. 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:
- Financial Health: Is CEG’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.
- Past Track Record: Has CEG 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 CEG’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.