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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 22x, you may consider DRDGOLD Limited (NYSE:DRD) as a highly attractive investment with its 9.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for DRDGOLD as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for DRDGOLD
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on DRDGOLD will help you shine a light on its historical performance.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as DRDGOLD's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 120% last year. Pleasingly, EPS has also lifted 764% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that DRDGOLD's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of DRDGOLD revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with DRDGOLD, and understanding them should be part of your investment process.