There's No Escaping Torex Gold Resources Inc.'s (TSE:TXG) Muted Earnings Despite A 25% Share Price Rise

The Torex Gold Resources Inc. (TSE:TXG) share price has done very well over the last month, posting an excellent gain of 25%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, Torex Gold Resources' price-to-earnings (or "P/E") ratio of 5.3x might still make it look like a strong buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 15x and even P/E's above 27x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been pleasing for Torex Gold Resources as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Torex Gold Resources

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

How Is Torex Gold Resources' Growth Trending?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.2% last year. Pleasingly, EPS has also lifted 87% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 18% each year over the next three years. That's not great when the rest of the market is expected to grow by 9.3% per year.

In light of this, it's understandable that Torex Gold Resources' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Shares in Torex Gold Resources are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Torex Gold Resources maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Torex Gold Resources that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.