Sentiment Still Eluding West African Resources Limited (ASX:WAF)

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 19x, you may consider West African Resources Limited (ASX:WAF) as a highly attractive investment with its 6.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

West African Resources has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for West African Resources

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like West African Resources' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 6,885% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 17% each year over the next three years. That's shaping up to be similar to the 17% per year growth forecast for the broader market.

In light of this, it's peculiar that West African Resources' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of West African Resources' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Having said that, be aware West African Resources is showing 1 warning sign in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.