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Wall Street JournalOrezone Gold Corporation (TSE:ORE) Soars 26% But It's A Story Of Risk Vs Reward
The Orezone Gold Corporation (TSE:ORE) share price has done very well over the last month, posting an excellent gain of 26%. The last month tops off a massive increase of 142% in the last year.
Even after such a large jump in price, Orezone Gold's price-to-earnings (or "P/E") ratio of 10.7x might still make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 17x and even P/E's above 29x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Recent times have been advantageous for Orezone Gold as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Orezone Gold
Is There Any Growth For Orezone Gold?
There's an inherent assumption that a company should underperform the market for P/E ratios like Orezone Gold's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 70%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 217% over the next year. With the market only predicted to deliver 23%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Orezone Gold is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Bottom Line On Orezone Gold's P/E
Despite Orezone Gold's shares building up a head of steam, its P/E still lags most other companies. 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.
Our examination of Orezone Gold's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
You need to take note of risks, for example - Orezone Gold has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
You might be able to find a better investment than Orezone Gold. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.