Subdued Growth No Barrier To Andean Precious Metals Corp. (TSE:APM) With Shares Advancing 25%
Andean Precious Metals Corp. (TSE:APM) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days were the cherry on top of the stock's 449% gain in the last year, which is nothing short of spectacular.
After such a large jump in price, Andean Precious Metals' price-to-earnings (or "P/E") ratio of 21.7x might make it look like a sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 16x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Andean Precious Metals could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Andean Precious Metals
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Andean Precious Metals' is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the two analysts following the company. That's shaping up to be similar to the 12% per annum growth forecast for the broader market.
With this information, we find it interesting that Andean Precious Metals is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From Andean Precious Metals' P/E?
The large bounce in Andean Precious Metals' shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Andean Precious Metals currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Plus, you should also learn about these 2 warning signs we've spotted with Andean Precious Metals.
If you're unsure about the strength of Andean Precious Metals' 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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