Iluka Resources Limited's (ASX:ILU) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 7.9x Iluka Resources Limited (ASX:ILU) may be sending very bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 19x and even P/E's higher than 37x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Iluka Resources hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Is There Any Growth For Iluka Resources?

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

Retrospectively, the last year delivered a frustrating 34% decrease to the company's bottom line. Even so, admirably EPS has lifted 221% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.2% per annum as estimated by the ten analysts watching the company. With the market predicted to deliver 17% growth per year, that's a disappointing outcome.

In light of this, it's understandable that Iluka Resources' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Iluka Resources' P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Iluka Resources maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Iluka Resources that you should be aware of.

If these risks are making you reconsider your opinion on Iluka Resources, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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