Insufficient Growth At Kumba Iron Ore Limited (JSE:KIO) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 5.8x Kumba Iron Ore Limited (JSE:KIO) may be sending bullish signals at the moment, given that almost half of all companies in South Africa have P/E ratios greater than 10x and even P/E's higher than 16x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Kumba Iron Ore has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for Kumba Iron Ore

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

How Is Kumba Iron Ore's Growth Trending?

Kumba Iron Ore's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 55%. However, this wasn't enough as the latest three year period has seen a very unpleasant 46% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 11% each year as estimated by the ten analysts watching the company. That's not great when the rest of the market is expected to grow by 14% per annum.

With this information, we are not surprised that Kumba Iron Ore is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Kumba Iron Ore's 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.

We've established that Kumba Iron Ore 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. 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 Kumba Iron Ore (1 can't be ignored) you should be aware of.

Of course, you might also be able to find a better stock than Kumba Iron Ore. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.