Mineral Commodities Ltd's (ASX:MRC) Shares Lagging The Market But So Is The Business
Mineral Commodities Ltd's (ASX:MRC) price-to-earnings (or "P/E") ratio of 14.7x might make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 20x and even P/E's above 38x 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 limited.
As an illustration, earnings have deteriorated at Mineral Commodities over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Check out our latest analysis for Mineral Commodities
Although there are no analyst estimates available for Mineral Commodities, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Mineral Commodities would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a frustrating 53% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 6.5% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Comparing that to the market, which is predicted to deliver 21% 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 understandable that Mineral Commodities' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Bottom Line On Mineral Commodities' 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 Mineral Commodities maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 5 warning signs for Mineral Commodities (of which 2 are a bit concerning!) you should know about.
If these risks are making you reconsider your opinion on Mineral Commodities, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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