When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 16x, you may consider Base Resources Limited (ASX:BSE) as a highly attractive investment with its 7.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Base Resources could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Does Base Resources Have A Relatively High Or Low P/E For Its Industry?
It's plausible that Base Resources' particularly low P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Metals and Mining industry are also 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. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.
Want the full picture on analyst estimates for the company? Then our free report on Base Resources will help you uncover what's on the horizon.
Is There Any Growth For Base Resources?
Base Resources' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to slump, contracting by 25% per annum during the coming three years according to the three analysts following the company. Meanwhile, the broader market is forecast to expand by 12% per annum, which paints a poor picture.
In light of this, it's understandable that Base Resources' P/E would sit below the majority of other companies. 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 Base Resources' P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Base Resources maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these 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 2 warning signs for Base Resources (of which 1 is a bit unpleasant!) you should know about.
If you're unsure about the strength of Base Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.