When close to half the companies in New Zealand have price-to-earnings ratios (or "P/E's") above 16x, you may consider Allied Farmers Limited (NZSE:ALF) as a highly attractive investment with its 7.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Allied Farmers has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
See our latest analysis for Allied Farmers
Is There Any Growth For Allied Farmers?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Allied Farmers' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 16%. The strong recent performance means it was also able to grow EPS by 169% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 5.4% shows it's noticeably more attractive on an annualised basis.
With this information, we find it odd that Allied Farmers is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Bottom Line On Allied Farmers' P/E
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.
We've established that Allied Farmers currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
You always need to take note of risks, for example - Allied Farmers has 1 warning sign we think you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
About NZSE:ALF
Flawless balance sheet with solid track record.
