Little Excitement Around Ferrexpo plc's (LON:FXPO) Earnings
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Ferrexpo plc's (LON:FXPO) price-to-earnings (or "P/E") ratio of 3.4x might make it look like a strong buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 16x and even P/E's above 30x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times have been advantageous for Ferrexpo 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.
Check out our latest analysis for Ferrexpo
How Does Ferrexpo's P/E Ratio Compare To Its Industry Peers?
It's plausible that Ferrexpo's particularly low P/E ratio could be a result of tendencies within its own industry. The image below shows that the Metals and Mining industry as a whole also has a P/E ratio lower than the market. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Metals and Mining industry. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ferrexpo.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Ferrexpo's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. The strong recent performance means it was also able to grow EPS by 114% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 21% per year as estimated by the nine analysts watching the company. Meanwhile, the broader market is forecast to expand by 8.1% per annum, which paints a poor picture.
With this information, we are not surprised that Ferrexpo is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Ferrexpo's P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Ferrexpo's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 3 warning signs for Ferrexpo you should be aware of, and 1 of them shouldn't be ignored.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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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