Investors Don't See Light At End Of Iress Limited's (ASX:IRE) Tunnel
When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 22x, you may consider Iress Limited (ASX:IRE) as an attractive investment with its 18.5x 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.
Iress certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Iress
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Iress' is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 335%. The strong recent performance means it was also able to grow EPS by 42% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.3% each year as estimated by the nine analysts watching the company. With the market predicted to deliver 18% growth per year, that's a disappointing outcome.
In light of this, it's understandable that Iress' 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What We Can Learn From Iress' P/E?
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 Iress 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.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Iress that you should be aware of.
You might be able to find a better investment than Iress. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.