Potential Upside For Nufarm Limited (ASX:NUF) Not Without Risk

There wouldn't be many who think Nufarm Limited's (ASX:NUF) price-to-earnings (or "P/E") ratio of 19.7x is worth a mention when the median P/E in Australia is similar at about 20x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

The recently shrinking earnings for Nufarm have been in line with the market. The P/E is probably moderate because investors think the company's earnings trend will continue to follow the rest of the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. At the very least, you'd be hoping that earnings don't accelerate downwards if your plan is to pick up some stock while it's not in favour.

Check out our latest analysis for Nufarm

Want the full picture on analyst estimates for the company? Then our free report on Nufarm will help you uncover what's on the horizon.

How Is Nufarm's Growth Trending?

The only time you'd be comfortable seeing a P/E like Nufarm's is when the company's growth is tracking the market closely.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 23% per annum over the next three years. With the market only predicted to deliver 17% per annum, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Nufarm is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Nufarm's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Nufarm's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Nufarm with six simple checks.

If you're unsure about the strength of Nufarm's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.