Should You Be Tempted To Sell Barrick Gold Corporation (TSE:ABX) At Its Current PE Ratio?
Barrick Gold Corporation (TSX:ABX) is trading with a trailing P/E of 16.2x, which is higher than the industry average of 11.2x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Barrick Gold
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for ABX
Price-Earnings Ratio = Price per share ÷ Earnings per share
ABX Price-Earnings Ratio = $12.75 ÷ $0.786 = 16.2x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ABX, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. ABX’s P/E of 16.2x is higher than its industry peers (11.2x), which implies that each dollar of ABX’s earnings is being overvalued by investors. Therefore, according to this analysis, ABX is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your ABX shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to ABX, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ABX, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing ABX to are fairly valued by the market. If this does not hold true, ABX’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to ABX. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ABX’s future growth? Take a look at our free research report of analyst consensus for ABX’s outlook.
Past Track Record: Has ABX been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ABX’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
