Iluka Resources Limited's (ASX:ILU) Earnings Are Not Doing Enough For Some Investors

Iluka Resources Limited's (ASX:ILU) price-to-earnings (or "P/E") ratio of 13.4x 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 18x and even P/E's above 36x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Iluka Resources as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Iluka Resources

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

How Is Iluka Resources' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 246% gain to the company's bottom line. As a result, it also grew EPS by 19% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 3.0% per year as estimated by the eight analysts watching the company. With the market predicted to deliver 13% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Iluka 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 the weak outlook is 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.

As we suspected, our examination of Iluka Resources' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

You always need to take note of risks, for example - Iluka Resources has 1 warning sign we think you should be aware of.

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 P/E ratio below 20x).

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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.