Benign Growth For Adecoagro S.A. (NYSE:AGRO) Underpins Its Share Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Adecoagro S.A. (NYSE:AGRO) as a highly attractive investment with its 5.1x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Adecoagro has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 out of favour.

View our latest analysis for Adecoagro

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Adecoagro.

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 Adecoagro's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 137% gain to the company's bottom line. Pleasingly, EPS has also lifted 140% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 20% per year over the next three years. Meanwhile, the broader market is forecast to expand by 10% per annum, which paints a poor picture.

In light of this, it's understandable that Adecoagro's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Adecoagro maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Adecoagro (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

You might be able to find a better investment than Adecoagro. 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.