GrainCorp Limited's (ASX:GNC) P/E Is On The Mark

With a price-to-earnings (or "P/E") ratio of 26.2x GrainCorp Limited (ASX:GNC) may be sending bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 20x and even P/E's lower than 11x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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GrainCorp could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for GrainCorp

Keen to find out how analysts think GrainCorp's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as GrainCorp's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 28% 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 78% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16% per annum, which is noticeably less attractive.

With this information, we can see why GrainCorp is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of GrainCorp's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for GrainCorp (of which 1 is concerning!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.