Is Elemental Royalty (TSX:ELE) Fully Valued Following Its Russell Index Additions?

Index additions put Elemental Royalty in front of more investors

Elemental Royalty (TSX:ELE) has been added to a wide range of Russell indexes, including the Russell 2000, Russell 3000 and several value and defensive sub indexes, bringing the stock onto more institutional radars.

See our latest analysis for Elemental Royalty.

Elemental Royalty’s recent index inclusions have coincided with a 13.59% 1 month share price return and a 4.52% year to date share price gain. Its 3 year total shareholder return of 84.81% contrasts with weaker 90 day share price momentum, which has declined 19.05%.

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Elemental Royalty now sits between a bullish story of index driven attention and a cautious view shaped by recent share price weakness and current losses, so which side does the valuation actually back up?

Preferred price to sales multiple of 18x for Elemental Royalty: Is it justified?

Elemental Royalty currently trades on a P/S ratio of 18x, which looks expensive when set against both peers and the wider Canadian Metals and Mining industry, even after the recent share price pullback to CA$22.65.

The P/S multiple compares the company’s market value to its revenue and is often used for businesses that are not yet profitable. This is the case here, with Elemental Royalty reporting a net loss of CA$0.59m on revenue of CA$56.33m.

For investors, this kind of revenue based valuation suggests the market is placing a high value on each dollar of current sales while the company is still loss making. This raises the question of whether the forecast 16.1% annual revenue growth and the royalty portfolio’s geographic spread across Africa, Australia and North America are enough to support such a premium.

Compared with the Canadian Metals and Mining industry average P/S of 4.8x and a peer average of 5.8x, Elemental Royalty’s 18x multiple is more than triple both reference points. It also sits above the estimated fair P/S of 13.6x that our model suggests the market could eventually gravitate toward if expectations cool.

Explore the SWS fair ratio for Elemental Royalty

Result: Price-to-sales of 18x (OVERVALUED)

However, Elemental Royalty’s premium P/S multiple rests on revenue growth expectations and a diversified royalty portfolio. As a result, any slowdown in sales or asset underperformance could quickly challenge that story.

Find out about the key risks to this Elemental Royalty narrative.

Another view on Elemental Royalty's value

While the 18x P/S ratio makes Elemental Royalty look expensive against peers and its own fair ratio, the SWS DCF model points the same way, with an estimated value of CA$11.60 per share versus a market price around CA$22.27. How comfortable are you paying that kind of premium?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Elemental Royalty for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 6 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With Elemental Royalty trading at a premium and sentiment clearly split, are you comfortable with the balance of opportunity and risk here, or not just yet? Act quickly, review the data points that matter most to you, and check the 2 key rewards and 1 important warning sign.

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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.

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