Torex Gold Resources Inc.'s (TSE:TXG) Shares Leap 30% Yet They're Still Not Telling The Full Story
Torex Gold Resources Inc. (TSE:TXG) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The last month tops off a massive increase of 103% in the last year.
Even after such a large jump in price, there still wouldn't be many who think Torex Gold Resources' price-to-earnings (or "P/E") ratio of 15x is worth a mention when the median P/E in Canada is similar at about 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Torex Gold Resources certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.
View our latest analysis for Torex Gold Resources
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Torex Gold Resources' is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 100% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 44% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 19% each year as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 10% each year growth forecast for the broader market.
In light of this, it's curious that Torex Gold Resources' P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Key Takeaway
Torex Gold Resources appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Torex Gold Resources currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Torex Gold Resources you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.