Lundin Gold Inc.'s (TSE:LUG) P/E Is Still On The Mark Following 29% Share Price Bounce

The Lundin Gold Inc. (TSE:LUG) share price has done very well over the last month, posting an excellent gain of 29%. The last month tops off a massive increase of 150% in the last year.

After such a large jump in price, given around half the companies in Canada have price-to-earnings ratios (or "P/E's") below 14x, you may consider Lundin Gold as a stock to potentially avoid with its 21.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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.

How Is Lundin Gold's Growth Trending?

Lundin Gold's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered an exceptional 205% gain to the company's bottom line. The latest three year period has also seen an excellent 55% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the eight analysts watching the company. With the market only predicted to deliver 10% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Lundin Gold is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Lundin Gold's P/E?

The large bounce in Lundin Gold's shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Lundin Gold's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Lundin Gold that you need to be mindful 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.