Unpleasant Surprises Could Be In Store For Kinross Gold Corporation's (TSE:K) Shares

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 13x, you may consider Kinross Gold Corporation (TSE:K) as a stock to avoid entirely with its 30.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been pleasing for Kinross Gold as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Kinross Gold

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Is There Enough Growth For Kinross Gold?

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

Retrospectively, the last year delivered an exceptional 257% gain to the company's bottom line. Still, incredibly EPS has fallen 77% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 44% per annum during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 9.5% growth per annum, that's a disappointing outcome.

In light of this, it's alarming that Kinross Gold's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Final Word

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 Kinross Gold currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Kinross Gold (1 can't be ignored!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.