Exxaro Resources Limited's (JSE:EXX) Earnings Are Not Doing Enough For Some Investors

Exxaro Resources Limited's (JSE:EXX) price-to-earnings (or "P/E") ratio of 4.2x might make it look like a strong buy right now compared to the market in South Africa, where around half of the companies have P/E ratios above 10x and even P/E's above 15x are quite common. 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.

While the market has experienced earnings growth lately, Exxaro Resources' 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 this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Exxaro Resources

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

Does Growth Match The Low P/E?

Exxaro Resources' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 9.2%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 57% 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.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 13% per annum as estimated by the eight analysts watching the company. With the market predicted to deliver 13% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Exxaro Resources' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Exxaro Resources' 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.

As we suspected, our examination of Exxaro Resources' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Exxaro Resources (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.