Lacklustre Performance Is Driving Dundee Precious Metals Inc.'s (TSE:DPM) Low P/E

With a price-to-earnings (or "P/E") ratio of 8.9x Dundee Precious Metals Inc. (TSE:DPM) may be sending bullish signals at the moment, given that almost half of all companies in Canada have P/E ratios greater than 14x and even P/E's higher than 28x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Dundee Precious Metals certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Dundee Precious Metals

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

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

Dundee Precious Metals' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. The strong recent performance means it was also able to grow EPS by 38% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 10% each year over the next three years. With the market predicted to deliver 13% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that Dundee Precious Metals' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Dundee Precious Metals' P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Dundee Precious Metals maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Dundee Precious Metals you should be aware of.

Of course, you might also be able to find a better stock than Dundee Precious Metals. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.