What Does Cadence Minerals Plc's (LON:KDNC) PE Ratio Tell You?

This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today's market.

Cadence Minerals Plc (LON:KDNC) is currently trading at a trailing P/E of 12.8x, which is higher than the industry average of 11.2x. While KDNC might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.

See our latest analysis for Cadence Minerals

What you need to know about the P/E ratio

A common ratio used for relative valuation is the P/E ratio. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each pound of the company’s earnings.

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to KDNC, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

KDNC’s P/E of 12.8x is higher than its industry peers (11.2x), which implies that each dollar of KDNC’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 24 Metals and Mining companies in GB including Cora Gold, Patagonia Gold and Ferrexpo. Therefore, according to this analysis, KDNC is an over-priced stock.

Assumptions to watch out for

However, before you rush out to sell your KDNC shares, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to KDNC. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared lower growth firms with KDNC, then KDNC’s P/E would naturally be higher since investors would reward KDNC’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with KDNC, KDNC’s P/E would again be higher since investors would reward KDNC’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing KDNC to are fairly valued by the market. If this assumption does not hold true, KDNC’s higher P/E ratio may be because firms in our peer group are being undervalued by the market.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in KDNC. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for KDNC’s future growth? Take a look at our free research report of analyst consensus for KDNC’s outlook.
2. Past Track Record: Has KDNC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of KDNC's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.