Market Sees Little To Confide In Elders Limited (ASX:ELD) Yet

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider Elders Limited (ASX:ELD) as an attractive investment with its 14.2x 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.

Elders certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Elders

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Elders.

Is There Any Growth For Elders?

In order to justify its P/E ratio, Elders would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 2.2% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 4.4% per year during the coming three years according to the seven analysts following the company. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Elders' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of Elders' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Elders (1 can't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Elders, 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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