When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Agnico Eagle Mines Limited (NYSE:AEM) as an attractive investment with its 9.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Agnico Eagle Mines certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

How Is Agnico Eagle Mines' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Agnico Eagle Mines' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 251% gain to the company's bottom line. Pleasingly, EPS has also lifted 91% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 32% each year during the coming three years according to the eight analysts following the company. With the market predicted to deliver 10% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that Agnico Eagle Mines' 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 Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Agnico Eagle Mines maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Having said that, be aware Agnico Eagle Mines is showing 4 warning signs in our investment analysis, and 1 of those is a bit concerning.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.