Improved Earnings Required Before Exxaro Resources Limited (JSE:EXX) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 4.7x Exxaro Resources Limited (JSE:EXX) may be sending bullish signals at the moment, given that almost half of all companies in South Africa have P/E ratios greater than 9x and even P/E's higher than 14x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Exxaro Resources hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

Check out 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?

In order to justify its P/E ratio, Exxaro Resources would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. As a result, earnings from three years ago have also fallen 29% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 4.4% each year over the next three years. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.

With this information, we can see why Exxaro Resources is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Exxaro Resources' P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Exxaro Resources maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Exxaro Resources that you should be aware of.

If you're unsure about the strength of Exxaro Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.