When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Royal Gold, Inc. (NASDAQ:RGLD) as a stock to avoid entirely with its 32.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Royal Gold has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
Check out our latest analysis for Royal Gold
Is There Enough Growth For Royal Gold?
The only time you'd be truly comfortable seeing a P/E as steep as Royal Gold's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.1%. As a result, earnings from three years ago have also fallen 1.4% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the five analysts following the company. That's shaping up to be similar to the 13% each year growth forecast for the broader market.
In light of this, it's curious that Royal Gold's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Royal Gold's P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Royal Gold's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Royal Gold with six simple checks on some of these key factors.
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.