The Market Lifts Serabi Gold plc (LON:SRB) Shares 31% But It Can Do More

Despite an already strong run, Serabi Gold plc (LON:SRB) shares have been powering on, with a gain of 31% in the last thirty days. The last month tops off a massive increase of 261% in the last year.

In spite of the firm bounce in price, Serabi Gold may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.5x, since almost half of all companies in the United Kingdom have P/E ratios greater than 17x and even P/E's higher than 28x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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

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Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 339% gain to the company's bottom line. The latest three year period has also seen an excellent 147% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 95% as estimated by the dual analysts watching the company. With the market only predicted to deliver 17%, the company is positioned for a stronger earnings result.

With this information, we find it odd that Serabi Gold is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Serabi Gold's P/E?

The latest share price surge wasn't enough to lift Serabi Gold's P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Serabi Gold with six simple checks.

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.