With a price-to-earnings (or "P/E") ratio of 11.4x Nickel Mines Limited (ASX:NIC) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 20x and even P/E's higher than 38x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Nickel Mines could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nickel Mines.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Nickel Mines' is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a worthy increase of 2.8%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 15% per annum over the next three years. With the market predicted to deliver 15% growth each year, the company is positioned for a comparable earnings result.
In light of this, it's peculiar that Nickel Mines' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
What We Can Learn From Nickel Mines' P/E?
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 Nickel Mines currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
Having said that, be aware Nickel Mines is showing 2 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Nickel Mines, explore our interactive list of high quality stocks to get an idea of what else is out there.
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.
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