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How Does Ramelius Resources's (ASX:RMS) P/E Compare To Its Industry, After Its Big Share Price Gain?

Ramelius Resources (ASX:RMS) shareholders are no doubt pleased to see that the share price has had a great month, posting a 31% gain, recovering from prior weakness. Zooming out, the annual gain of 156% knocks our socks off.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Ramelius Resources

Does Ramelius Resources Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 34.92 that there is some investor optimism about Ramelius Resources. You can see in the image below that the average P/E (13.6) for companies in the metals and mining industry is lower than Ramelius Resources's P/E.

ASX:RMS Price Estimation Relative to Market, January 20th 2020
ASX:RMS Price Estimation Relative to Market, January 20th 2020

That means that the market expects Ramelius Resources will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Ramelius Resources saw earnings per share decrease by 36% last year. And over the longer term (3 years) earnings per share have decreased 14% annually. This growth rate might warrant a low P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Ramelius Resources's Balance Sheet

Ramelius Resources has net cash of AU$102m. This is fairly high at 12% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Ramelius Resources's P/E Ratio

Ramelius Resources trades on a P/E ratio of 34.9, which is above its market average of 19.2. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What is very clear is that the market has become significantly more optimistic about Ramelius Resources over the last month, with the P/E ratio rising from 26.6 back then to 34.9 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Ramelius Resources. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.