Earnings Working Against Elders Limited's (ASX:ELD) Share Price

Elders Limited's (ASX:ELD) price-to-earnings (or "P/E") ratio of 11.6x might make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 21x and even P/E's above 37x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings that are retreating more than the market's of late, Elders has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Elders

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?

There's an inherent assumption that a company should underperform the market for P/E ratios like Elders' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 20% 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 4.0% per year during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 17% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Elders is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Elders' 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.

We've established that Elders maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Elders, and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.