Earnings Tell The Story For Cleveland-Cliffs Inc. (NYSE:CLF)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Cleveland-Cliffs Inc. (NYSE:CLF) as a stock to potentially avoid with its 19.8x 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 as high as it is.

Cleveland-Cliffs has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Cleveland-Cliffs

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

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

Cleveland-Cliffs' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 25% per year as estimated by the eleven analysts watching the company. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.

With this information, we can see why Cleveland-Cliffs 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 Bottom Line On Cleveland-Cliffs' P/E

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.

As we suspected, our examination of Cleveland-Cliffs' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Cleveland-Cliffs is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Cleveland-Cliffs, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com