SouthGobi Resources Ltd. (CVE:SGQ) Not Doing Enough For Some Investors As Its Shares Slump 31%

SouthGobi Resources Ltd. (CVE:SGQ) shares have had a horrible month, losing 31% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 50% share price decline.

After such a large drop in price, SouthGobi Resources may be sending very bullish signals at the moment with its price-to-earnings (or “P/E”) ratio of 4.1x, since almost half of all companies in Canada have P/E ratios greater than 18x and even P/E’s higher than 33x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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For instance, SouthGobi Resources’ receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn’t eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for SouthGobi Resources

We don’t have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SouthGobi Resources’ earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

There’s an inherent assumption that a company should far underperform the market for P/E ratios like SouthGobi Resources’ to be considered reasonable.

If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 64%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn’t have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 22% shows it’s noticeably less attractive on an annualised basis.

In light of this, it’s understandable that SouthGobi Resources’ P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Having almost fallen off a cliff, SouthGobi Resources’ share price has pulled its P/E way down as well. 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.

As we suspected, our examination of SouthGobi Resources revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don’t want to rain on the parade too much, but we did also find 6 warning signs for SouthGobi Resources (4 are a bit concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on SouthGobi Resources, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.