With a price-to-earnings (or "P/E") ratio of 13.4x LyondellBasell Industries N.V. (NYSE:LYB) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, LyondellBasell Industries has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.
How Is LyondellBasell Industries' Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like LyondellBasell Industries' to be considered reasonable.
Retrospectively, the last year delivered a decent 10% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 42% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 10% growth per year, the company is positioned for a comparable earnings result.
In light of this, it's peculiar that LyondellBasell Industries' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.
What We Can Learn From LyondellBasell Industries' 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.
Our examination of LyondellBasell Industries' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with LyondellBasell Industries, and understanding 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
