Whitehaven Coal Limited's (ASX:WHC) Price Is Right But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 2.3x Whitehaven Coal Limited (ASX:WHC) may be sending very bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 19x and even P/E's higher than 37x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Whitehaven Coal 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. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Whitehaven Coal

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

Is There Any Growth For Whitehaven Coal?

The only time you'd be truly comfortable seeing a P/E as depressed as Whitehaven Coal's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 56% gain to the company's bottom line. Pleasingly, EPS has also lifted 10,413% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 40% per annum as estimated by the ten analysts watching the company. With the market predicted to deliver 17% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that Whitehaven Coal is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Whitehaven Coal's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Whitehaven Coal's analyst forecasts revealed that its outlook for shrinking earnings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Whitehaven Coal (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Whitehaven Coal's 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.