What Royal Gold, Inc.'s (NASDAQ:RGLD) P/E Is Not Telling You

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Royal Gold, Inc. (NASDAQ:RGLD) as a stock to avoid entirely with its 34.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Royal Gold hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Royal Gold

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Royal Gold.

Does Growth Match The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.1%. The last three years don't look nice either as the company has shrunk EPS by 1.4% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 9.7% per year over the next three years. That's shaping up to be materially lower than the 13% each year growth forecast for the broader market.

With this information, we find it concerning that Royal Gold is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Royal Gold's P/E

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.

We've established that Royal Gold currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Royal Gold with six simple checks.

You might be able to find a better investment than Royal Gold. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.