This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Kirkland Lake Gold Ltd.’s (TSE:KL) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Kirkland Lake Gold’s P/E ratio is 23.16. That corresponds to an earnings yield of approximately 4.3%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Kirkland Lake Gold:
P/E of 23.16 = $24.85 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $1.07 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Kirkland Lake Gold increased earnings per share by a whopping 92% last year. And earnings per share have improved by 60% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Kirkland Lake Gold’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (9.6) for companies in the metals and mining industry is lower than Kirkland Lake Gold’s P/E.
Kirkland Lake Gold’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Kirkland Lake Gold’s Balance Sheet
Since Kirkland Lake Gold holds net cash of US$230m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Kirkland Lake Gold’s P/E Ratio
Kirkland Lake Gold trades on a P/E ratio of 23.2, which is above the CA market average of 12.8. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. Therefore it seems reasonable that the market would have relatively high expectations of the company
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Kirkland Lake Gold. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.