How Does Geodrill's (TSE:GEO) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
Simply Wall St.

Unfortunately for some shareholders, the Geodrill (TSE:GEO) share price has dived 33% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 9.2% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

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See our latest analysis for Geodrill

Does Geodrill Have A Relatively High Or Low P/E For Its Industry?

Geodrill's P/E of 10.33 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Geodrill has a lower P/E than the average (12.2) in the metals and mining industry classification.

TSX:GEO Price Estimation Relative to Market March 27th 2020
TSX:GEO Price Estimation Relative to Market March 27th 2020

Its relatively low P/E ratio indicates that Geodrill shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Geodrill's 479% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Unfortunately, earnings per share are down 19% a year, over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Geodrill's Debt Impact Its P/E Ratio?

Geodrill has net cash of US$7.2m. This is fairly high at 18% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Geodrill's P/E Ratio

Geodrill's P/E is 10.3 which is about average (10.7) in the CA market. The excess cash it carries is the gravy on top its fast EPS growth. So at a glance we're a bit surprised that Geodrill does not have a higher P/E ratio. Given Geodrill's P/E ratio has declined from 15.5 to 10.3 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Geodrill may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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