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There wouldn't be many who think Imdex Limited's (ASX:IMD) price-to-earnings (or "P/E") ratio of 16.2x is worth a mention when the median P/E in Australia is similar at about 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent times have been advantageous for Imdex as its earnings have been rising faster than most other companies. 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.
Keen to find out how analysts think Imdex's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Some Growth For Imdex?
There's an inherent assumption that a company should be matching the market for P/E ratios like Imdex's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.5% per year as estimated by the six analysts watching the company. With the market predicted to deliver 13% growth each year, that's a disappointing outcome.
In light of this, it's somewhat alarming that Imdex's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.
The Bottom Line On Imdex's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Imdex currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Before you take the next step, you should know about the 2 warning signs for Imdex that we have uncovered.
Of course, you might also be able to find a better stock than Imdex. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
This article by Simply Wall St is general in nature. 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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