Ansell Limited's (ASX:ANN) P/E Is On The Mark

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider Ansell Limited (ASX:ANN) as a stock to potentially avoid with its 24.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Ansell hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Ansell

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

Is There Enough Growth For Ansell?

Ansell's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 28%. This means it has also seen a slide in earnings over the longer-term as EPS is down 53% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 18% each year, which is noticeably less attractive.

With this information, we can see why Ansell is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

As we suspected, our examination of Ansell's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Ansell that you should be aware of.

You might be able to find a better investment than Ansell. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com