How to value resources stocks? Here are 3 unique multiples investors can use

The question of how to value resources stocks on the ASX is not an easy one to answer, because there are so many additional factors that must be taken into account that aren’t as relevant in other sectors. Some valuation methodologies may be completely irrelevant to the sector.

But there are some ways to value resources stocks nonetheless. And in this article, we recap 3 unique multiples for resources stocks.

How to value resources stocks?

1. EV/Resource

The EV/Resource multiple is a financial ratio used to measure the efficiency of a company’s resources. It shows how much economic value each resource is creating for the company. The formula for calculating the EV/Resource multiple is: Economic Value (EV) divided by Total Resources (TR).

Economic Value measures the amount of money that a company is able to generate from all its resources, such as labor, land, capital and technology. This includes sales revenue, profit or any other form of return on investment. Total Resources represent the total cost of acquiring and deploying all assets used in operations. This would include both tangible and intangible investments such as inventory and goodwill.

The EV/Resource multiple indicates how well a company is utilizing its resources to create economic value. A higher ratio suggests greater efficiency as it means more economic value is being generated from the same amount of resources spent. On the other hand, a lower ratio could indicate that investments are not generating their expected returns or that more efficient alternatives exist to achieve better results.

2. P/NAV or P/NTA

The price-to-net asset value (P/NAV) multiple (sometimes known as price-to-net-tangible-assets (P/NTA)), measures a company’s market capitalization relative to its net assets. The P/NAV multiple is calculated by dividing a company’s market capitalization by its total net assets.

This ratio can be used to compare companies in the same industry or sector and determine whether one stock may be undervalued compared to another. It also provides insight into how much investors are willing to pay for each dollar of a company’s net assets.

Granted, this is more commonly used for REITs or other property stocks and it may be less useful if a company has multiple projects. But it can be of some help if a company has just one resources.

3. P/CF

The P/CF multiple is a financial metric used to compare a company’s stock price to its cash flow per share. It is calculated by dividing the current stock price of the company by its cash flow per share (P/CF = Stock Price / Cash Flow Per Share).

It can be seen as a measure of how cheap or expensive the stock is in comparison to its cash flow generating ability. Generally, investors prefer stocks with lower P/CF ratios because it indicates that the company has strong cash flows relative to its price, which could potentially lead to higher returns over time. On the other hand, if the P/CF ratio is too high, it could imply that the stock has become overly expensive relative to its cash flows.

In addition, P/CF is useful for comparing companies in different industries since it’s not weighed down by assets or liabilities that vary across businesses. This makes it easier for investors to quickly compare companies within an industry without having to consider any factors unique to each business.

Ultimately, we would caution investors that this metric should not be used alone. Yes, this applies to all multiples we have mentioned, but particularly P/CF since it does not take into account any non-cash items such as depreciation or write-offs which may impact a company’s financials.

Investors need to consider other factors

Ultimately, when it comes to how to value resources stocks, all these metrics should not be the sole basis of your investment decision. Investors should consider other factors such as jurisdiction of the project and the JORC Resource. Check out our article from earlier this week for a closer look at some of the factors investors need to consider!

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