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What Does Silver Lake Resources Limited’s (ASX:SLR) PE Ratio Tell You?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

Silver Lake Resources Limited (ASX:SLR) is trading with a trailing P/E of 17.7, which is higher than the industry average of 9.9. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.

Check out our latest analysis for Silver Lake Resources

Breaking down the P/E ratio

ASX:SLR PE PEG Gauge October 18th 18
ASX:SLR PE PEG Gauge October 18th 18

The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

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P/E Calculation for SLR

Price-Earnings Ratio = Price per share ÷ Earnings per share

SLR Price-Earnings Ratio = A$0.57 ÷ A$0.0321 = 17.7x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SLR, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 17.7, SLR’s P/E is higher than its industry peers (9.9). This implies that investors are overvaluing each dollar of SLR’s earnings. This multiple is a median of profitable companies of 25 Metals and Mining companies in AU including Aeris Resources, Citigold and Highlands Pacific. You could think of it like this: the market is pricing SLR as if it is a stronger company than the average of its industry group.

Assumptions to watch out for

Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to SLR. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Silver Lake Resources Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. We should also be aware that the stocks we are comparing to SLR may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in SLR. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for SLR’s future growth? Take a look at our free research report of analyst consensus for SLR’s outlook.

  2. Past Track Record: Has SLR been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SLR’s historicals for more clarity.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.