It's not a stretch to say that Northam Platinum Holdings Limited's (JSE:NPH) price-to-earnings (or "P/E") ratio of 7.1x right now seems quite "middle-of-the-road" compared to the market in South Africa, where the median P/E ratio is around 9x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Northam Platinum Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
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What Are Growth Metrics Telling Us About The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Northam Platinum Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's bottom line. Even so, admirably EPS has lifted 14,590% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 9.5% per annum during the coming three years according to the seven analysts following the company. With the market only predicted to deliver 7.0% each year, the company is positioned for a stronger earnings result.
In light of this, it's curious that Northam Platinum Holdings' P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Northam Platinum Holdings currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.