Ingredion Incorporated's (NYSE:INGR) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 12x Ingredion Incorporated (NYSE:INGR) 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 20x and even P/E's higher than 35x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent times haven't been advantageous for Ingredion as its earnings have been rising slower than most other companies. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Ingredion

How Is Ingredion's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Ingredion's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 4.9%. This was backed up an excellent period prior to see EPS up by 54% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 1.3% per annum over the next three years. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader market.

In light of this, it's understandable that Ingredion's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Ingredion's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Ingredion is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Ingredion's 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.