Grange Resources Limited's (ASX:GRR) Prospects Need A Boost To Lift Shares

Grange Resources Limited's (ASX:GRR) price-to-earnings (or "P/E") ratio of 5.8x might make it look like a strong 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 38x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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For example, consider that Grange Resources' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Grange Resources

Although there are no analyst estimates available for Grange Resources, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Grange Resources' Growth Trending?

In order to justify its P/E ratio, Grange Resources would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 57% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 82% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's an unpleasant look.

With this information, we are not surprised that Grange Resources 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 recent earnings trends are already weighing down the shares.

The Key Takeaway

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 Grange Resources maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Grange Resources (1 can't be ignored!) that we have uncovered.

If you're unsure about the strength of Grange Resources' 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.