Of late the Aura Minerals (TSE:ORA) share price has softened like an ice cream in the sun, melting a full 35%. But plenty of shareholders will still be smiling, given that the stock is up 112% over the last quarter. The good news is that in the last year, the stock has shone bright like a diamond, gaining 173%.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. Perhaps the simplest way to get a read on investors’ expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does Aura Minerals Have A Relatively High Or Low P/E For Its Industry?
Aura Minerals’s P/E of 6.78 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (12.3) for companies in the metals and mining industry is higher than Aura Minerals’s P/E.
This suggests that market participants think Aura Minerals will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Aura Minerals shrunk earnings per share by 54% over the last year. And it has shrunk its earnings per share by 3.6% per year over the last three years. This growth rate might warrant a low P/E ratio.
Remember: P/E Ratios Don’t Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Aura Minerals’s Balance Sheet
Net debt totals just 1.8% of Aura Minerals’s market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Verdict On Aura Minerals’s P/E Ratio
Aura Minerals’s P/E is 6.8 which is below average (10.6) in the CA market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Aura Minerals’s P/E ratio has declined from 10.4 to 6.8 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don’t have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Aura Minerals. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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