Here’s What Hillgrove Resources Limited’s (ASX:HGO) P/E Ratio Is Telling Us – Simply Wall St News

Here’s What Hillgrove Resources Limited’s (ASX:HGO) P/E Ratio Is Telling Us – Simply Wall St News


The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Hillgrove Resources Limited’s (ASX:HGO), to help you decide if the stock is worth further research. What is Hillgrove Resources’s P/E ratio? Well, based on the last twelve months it is 1.85. That is equivalent to an earnings yield of about 54.0%.

Check out our latest analysis for Hillgrove Resources

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Hillgrove Resources:

P/E of 1.85 = A$0.07 ÷ A$0.04 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each A$1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Hillgrove Resources’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (13.1) for companies in the metals and mining industry is higher than Hillgrove Resources’s P/E.

ASX:HGO Price Estimation Relative to Market, November 29th 2019
ASX:HGO Price Estimation Relative to Market, November 29th 2019

Hillgrove Resources’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Hillgrove Resources, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Hillgrove Resources’s earnings made like a rocket, taking off 112% last year.

Remember: P/E Ratios Don’t Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won’t reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Hillgrove Resources’s Debt Impact Its P/E Ratio?

Since Hillgrove Resources holds net cash of AU$2.7m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Hillgrove Resources’s P/E Ratio

Hillgrove Resources’s P/E is 1.9 which is below average (18.8) in the AU market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don’t have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.



Source link Google News

Share