Why Investors Shouldn't Be Surprised By Sasol Limited's (JSE:SOL) Low P/E
When close to half the companies in South Africa have price-to-earnings ratios (or "P/E's") above 9x, you may consider Sasol Limited (JSE:SOL) as an attractive investment with its 4.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that's superior to most other companies of late, Sasol has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.
See our latest analysis for Sasol
Want the full picture on analyst estimates for the company? Then our free report on Sasol will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Sasol's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 328%. Pleasingly, EPS has also lifted 1,003% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings growth is heading into negative territory, declining 0.5% each year over the next three years. Meanwhile, the broader market is forecast to expand by 5.6% each year, which paints a poor picture.
With this information, we are not surprised that Sasol 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 Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Sasol maintains its low P/E on the weakness of its forecast for sliding earnings, 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 these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 3 warning signs for Sasol (1 is a bit concerning!) that we have uncovered.
Of course, you might also be able to find a better stock than Sasol. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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