Potential Upside For DRDGOLD Limited (NYSE:DRD) Not Without Risk

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 23x, you may consider DRDGOLD Limited (NYSE:DRD) as a highly attractive investment with its 9.5x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for DRDGOLD as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 DRDGOLD

Although there are no analyst estimates available for DRDGOLD, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For DRDGOLD?

The only time you'd be truly comfortable seeing a P/E as depressed as DRDGOLD's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 120% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 764% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that DRDGOLD's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From DRDGOLD's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that DRDGOLD currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Having said that, be aware DRDGOLD is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than DRDGOLD. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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