Tate & Lyle plc's (LON:TATE) Business Is Yet to Catch Up With Its Share Price

With a median price-to-earnings (or "P/E") ratio of close to 15x in the United Kingdom, you could be forgiven for feeling indifferent about Tate & Lyle plc's (LON:TATE) P/E ratio of 14.6x. 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Tate & Lyle has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Tate & Lyle

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

What Are Growth Metrics Telling Us About The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Tate & Lyle's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 151%. EPS has also lifted 8.8% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 9.3% each year as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is noticeably more attractive.

In light of this, it's curious that Tate & Lyle's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Tate & Lyle's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Tate & Lyle currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

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

You might be able to find a better investment than Tate & Lyle. 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.