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When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 15x, you may consider ADBRI Limited (ASX:ABC) as a stock to avoid entirely with its 31.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
ADBRI hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Where Does ADBRI's P/E Sit Within Its Industry?
We'd like to see if P/E's within ADBRI's industry might provide some colour around the company's particularly high P/E ratio. It turns out the Basic Materials industry in general also has a P/E ratio significantly higher than the market, as the graphic below shows. So it appears the company's ratio could be influenced considerably by these industry numbers currently. Ordinarily, the majority of companies' P/E's would be lifted firmly by the general conditions within the Basic Materials industry. Nevertheless, the company's P/E should be primarily influenced by its own financial performance.
Want the full picture on analyst estimates for the company? Then our free report on ADBRI will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The High P/E?
ADBRI's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered a frustrating 75% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 75% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 26% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.
In light of this, it's understandable that ADBRI's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that ADBRI maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 4 warning signs for ADBRI you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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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