When close to half the companies in the United Arab Emirates have price-to-earnings ratios (or "P/E's") above 14x, you may consider Fertiglobe plc (ADX:FERTIGLB) as an attractive investment with its 7.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Fertiglobe certainly has been doing a good job lately as it's been growing earnings more 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 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.free report on Fertiglobe.
How Is Fertiglobe's Growth Trending?
Fertiglobe's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 279%. The latest three year period has also seen an excellent 8,336% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 13% over the next year. That's not great when the rest of the market is expected to grow by 6.4%.
In light of this, it's understandable that Fertiglobe's P/E would sit below the majority of other companies. 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 Bottom Line On Fertiglobe's P/E
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.
We've established that Fertiglobe 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. It's hard to see the share price rising strongly in the near future under these circumstances.
Plus, you should also learn about these 2 warning signs we've spotted with Fertiglobe (including 1 which is potentially serious).
Of course, you might also be able to find a better stock than Fertiglobe. 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.
Valuation is complex, but we're helping make it simple.
Find out whether Fertiglobe is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.