Many Still Looking Away From Darling Ingredients Inc. (NYSE:DAR)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Darling Ingredients Inc. (NYSE:DAR) as an attractive investment with its 11x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

While the market has experienced earnings growth lately, Darling Ingredients' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

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Is There Any Growth For Darling Ingredients?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.5%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 49% in total over the last three years. 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 twelve analysts covering the company suggest earnings should grow by 11% per year over the next three years. That's shaping up to be similar to the 13% per year growth forecast for the broader market.

With this information, we find it odd that Darling Ingredients is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

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.

We've established that Darling Ingredients currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Darling Ingredients you should be aware of.

If these risks are making you reconsider your opinion on Darling Ingredients, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.