Investors Still Waiting For A Pull Back In Sandstorm Gold Ltd. (TSE:SSL)

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 15x, you may consider Sandstorm Gold Ltd. (TSE:SSL) as a stock to avoid entirely with its 62.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Sandstorm Gold as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 40% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 37% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 25% per year during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.0% each year, which is noticeably less attractive.

In light of this, it's understandable that Sandstorm Gold's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Sandstorm Gold's P/E

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 Sandstorm Gold maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Plus, you should also learn about these 2 warning signs we've spotted with Sandstorm Gold.

If you're unsure about the strength of Sandstorm Gold's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.