Why Investors Shouldn't Be Surprised By Iofina plc's (LON:IOF) P/E

Iofina plc's (LON:IOF) price-to-earnings (or "P/E") ratio of 28.4x might make it look like a sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 24x and even P/E's below 13x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Iofina has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Iofina

Want the full picture on analyst estimates for the company? Then our free report on Iofina will help you uncover what's on the horizon.

How Is Iofina's Growth Trending?

In order to justify its P/E ratio, Iofina would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 94% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 320% as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 31%, which is noticeably less attractive.

In light of this, it's understandable that Iofina's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Iofina's 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.

As we suspected, our examination of Iofina's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Iofina has 3 warning signs (and 1 which is potentially serious) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

This article by Simply Wall St is general in nature. 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.

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