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It's not a stretch to say that Tsogo Sun Gaming Limited's (JSE:TSG) price-to-earnings (or "P/E") ratio of 7.1x right now seems quite "middle-of-the-road" compared to the market in South Africa, where the median P/E ratio is around 8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times have been quite advantageous for Tsogo Sun Gaming as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
View our latest analysis for Tsogo Sun Gaming
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 Tsogo Sun Gaming's earnings, revenue and cash flow.
Is There Some Growth For Tsogo Sun Gaming?
There's an inherent assumption that a company should be matching the market for P/E ratios like Tsogo Sun Gaming's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. EPS has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 8.7% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it's curious that Tsogo Sun Gaming's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Tsogo Sun Gaming revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.