What You Can Learn From Nutrien Ltd.'s (TSE:NTR) P/E

With a price-to-earnings (or "P/E") ratio of 34.3x Nutrien Ltd. (TSE:NTR) may be sending very bearish signals at the moment, given that almost half of all companies in Canada have P/E ratios under 15x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Nutrien 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 Nutrien

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

How Is Nutrien's Growth Trending?

Nutrien's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 66%. The last three years don't look nice either as the company has shrunk EPS by 63% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 12% each year growth forecast for the broader market.

With this information, we can see why Nutrien is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Nutrien's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Nutrien that you should be aware of.

You might be able to find a better investment than Nutrien. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.