Serabi Gold plc's (LON:SRB) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

The Serabi Gold plc (LON:SRB) share price has done very well over the last month, posting an excellent gain of 26%. The annual gain comes to 168% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Serabi Gold may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.4x, since almost half of all companies in the United Kingdom have P/E ratios greater than 17x and even P/E's higher than 30x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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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 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.

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.

How Is Serabi Gold's Growth Trending?

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 247% last year. Pleasingly, EPS has also lifted 552% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 10% each year over the next three years. That's shaping up to be materially lower than the 15% per year growth forecast for the broader market.

In light of this, it's understandable that Serabi Gold's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Serabi Gold's P/E

Even after such a strong price move, Serabi Gold's P/E still trails the rest of the market significantly. 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 Serabi Gold maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Serabi Gold with six simple checks on some of these key factors.

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.