Lundin Gold Inc.'s (TSE:LUG) 26% Price Boost Is Out Of Tune With Earnings

Explore Lundin Gold's Fair Values from the Community and select yours

Lundin Gold Inc. (TSE:LUG) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 197% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Lundin Gold's price-to-earnings (or "P/E") ratio of 22.9x 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 15x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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With earnings growth that's superior to most other companies of late, Lundin Gold has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Lundin Gold

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

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Lundin Gold's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 170% last year. The strong recent performance means it was also able to grow EPS by 262% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 4.7% per year over the next three years. That's shaping up to be materially lower than the 10% per year growth forecast for the broader market.

In light of this, it's alarming that Lundin 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 this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Lundin Gold's P/E is getting right up there since its shares have risen strongly. 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 Lundin Gold currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, 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 settle on your opinion, we've discovered 1 warning sign for Lundin Gold that you should be aware of.

Of course, you might also be able to find a better stock than Lundin Gold. 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.