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

Ansell Limited's (ASX:ANN) price-to-earnings (or "P/E") ratio of 25.6x might make it look like a sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. 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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While the market has experienced earnings growth lately, Ansell's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Ansell

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ansell.

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

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.2%. As a result, earnings from three years ago have also fallen 55% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the ten analysts watching the company. With the market only predicted to deliver 15% each year, the company is positioned for a stronger earnings result.

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.

We've established that Ansell maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Having said that, be aware Ansell is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Ansell. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.