Yahoo Finance How Does Newcrest Mining's (ASX:NCM) P/E Compare To Its Industry, After Its Big Share Price Gain?
Those holding Newcrest Mining (ASX:NCM) shares must be pleased that the share price has rebounded 22% in the last thirty days. But unfortunately, the stock is still down by 8.0% over a quarter. The full year gain of 16% is pretty reasonable, too.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Newcrest Mining
How Does Newcrest Mining's P/E Ratio Compare To Its Peers?
Newcrest Mining's P/E of 25.51 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (9.1) for companies in the metals and mining industry is lower than Newcrest Mining's P/E.
Its relatively high P/E ratio indicates that Newcrest Mining shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Newcrest Mining grew EPS like Taylor Swift grew her fan base back in 2010; the 64% gain was both fast and well deserved. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 8.5%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does Newcrest Mining's Balance Sheet Tell Us?
Net debt totals just 9.4% of Newcrest Mining's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Newcrest Mining's P/E Ratio
Newcrest Mining trades on a P/E ratio of 25.5, which is above its market average of 14.4. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So to be frank we are not surprised it has a high P/E ratio. What is very clear is that the market has become more optimistic about Newcrest Mining over the last month, with the P/E ratio rising from 20.9 back then to 25.5 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Newcrest Mining may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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