Northam Platinum Holdings Limited's (JSE:NPH) Price Is Right But Growth Is Lacking After Shares Rocket 31%

Northam Platinum Holdings Limited (JSE:NPH) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Even after such a large jump in price, Northam Platinum Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.8x, since almost half of all companies in South Africa have P/E ratios greater than 12x and even P/E's higher than 22x 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.

Northam Platinum Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

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Is There Any Growth For Northam Platinum Holdings?

In order to justify its P/E ratio, Northam Platinum Holdings would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 333% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 7.8% as estimated by the five analysts watching the company. That's not great when the rest of the market is expected to grow by 20%.

In light of this, it's understandable that Northam Platinum Holdings' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Northam Platinum Holdings' P/E

Northam Platinum Holdings' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Northam Platinum Holdings' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 3 warning signs for Northam Platinum Holdings that you should be aware of.

If you're unsure about the strength of Northam Platinum Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.

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