Lynas Rare Earths Limited's (ASX:LYC) Price In Tune With Earnings

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider Lynas Rare Earths Limited (ASX:LYC) as a stock to avoid entirely with its 29.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Lynas Rare Earths hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Lynas Rare Earths

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

Is There Enough Growth For Lynas Rare Earths?

The only time you'd be truly comfortable seeing a P/E as steep as Lynas Rare Earths' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 64% decrease to the company's bottom line. Even so, admirably EPS has lifted 846% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 33% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 18% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Lynas Rare Earths' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Lynas Rare Earths' P/E?

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 Lynas Rare Earths 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Lynas Rare Earths (1 is potentially serious) you should be aware of.

If you're unsure about the strength of Lynas Rare Earths' 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.

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