Yahoo Finance Investors Aren't Buying Iluka Resources Limited's (ASX:ILU) Earnings
When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 18x, you may consider Iluka Resources Limited (ASX:ILU) as an attractive investment with its 13.1x 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 limited.
Recent times have been advantageous for Iluka Resources 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.
See our latest analysis for Iluka Resources
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Iluka Resources.
How Is Iluka Resources' Growth Trending?
In order to justify its P/E ratio, Iluka Resources would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 246%. The latest three year period has also seen a 20% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings growth is heading into negative territory, declining 3.0% each year over the next three years. That's not great when the rest of the market is expected to grow by 13% per year.
With this information, we are not surprised that Iluka Resources is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
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.
As we suspected, our examination of Iluka Resources' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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 settle on your opinion, we've discovered 1 warning sign for Iluka Resources that you should be aware of.
If you're unsure about the strength of Iluka Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
