Further Upside For Serabi Gold plc (LON:SRB) Shares Could Introduce Price Risks After 28% Bounce

Despite an already strong run, Serabi Gold plc (LON:SRB) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 164% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Serabi Gold's price-to-earnings (or "P/E") ratio of 5.5x might still make it look like a strong buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 16x and even P/E's above 28x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Serabi Gold has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Serabi Gold

Keen to find out how analysts think Serabi Gold's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Serabi Gold's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 339% last year. The strong recent performance means it was also able to grow EPS by 147% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 107% over the next year. Meanwhile, the rest of the market is forecast to only expand by 20%, which is noticeably less attractive.

In light of this, it's peculiar that Serabi Gold's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Shares in Serabi Gold 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.

Our examination of Serabi Gold's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Serabi Gold that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.