A Deeper Look At Argonaut Gold Inc’s (TSE:AR) Share Price

AR is currently trading at a reasonable trailing PE of 12.16x, which is within a fair range of the Metals and Mining industry average of 11.19x. But can investors make a closing judgement of the company’s value based on this multiple? The answer is no, since important variables like the company’s potential to grow and debt levels are ignored in the PE’s calculation. Let’s dive in.

Is AR making any money?

The PE multiple is useful for when a company is profitable, which is the case with AR. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. Companies like this are often valued based off other relevant factors, using multiples like P/S (price-to-sales) or P/FCF (price-to-free-cash-flow) depending on the business characteristics. Historically, AR has not always been profitable, until 2016 saw a breakeven period with earnings of CA$4.33m, followed by the most recent bottom-line of CA$24.06m. This means an earnings-based multiple such as the PE ratio can be a useful valuation instrument, however, there may be a better option.

TSX:AR Future Profit June 25th 18
TSX:AR Future Profit June 25th 18

Is AR in a lot of debt?

No. AR has a negligible level of debt at 1.25%, meaning that basically the majority of investment capital has come from equity investors. As a result, the risks associated with debt funding are trivial, and from a valuation perspective, the use of the PE ratio still remains valid and useful.

Will AR experience high growth?

According to industry analyst consensus of earnings estimates, the bottom line is expected to grow by 33.31% every year for the next 5 years. This gives AR an extremely high growth outlook. The issue with using current earnings in the denominator of a multiple is that it doesn’t reflect this expected growth, which is a limitation for using past (or “trailing”) values of EBITDA. You should pay for what you’re going to get, not what’s already happened. To account for this growth we can use the one-year analyst-consensus future EBITDA (this is a “forward” multiple).

AR’s forward EV/EBITDA = CA$280.54m /CA$98.26m = 2.86x

AR is undervalued when comparing its multiple to the 4.83x industry average. and to a greater extent than what was indicated by the trailing EV/EBITDA ratio.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has 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 ‘s historicals for more clarity.
  3. 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.