The Archer-Daniels-Midland Company (NYSE:ADM) share price has fared very poorly over the last month, falling by a substantial 25%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 36% in that time.

Even after such a large drop in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may still consider Archer-Daniels-Midland as a highly attractive investment with its 7.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With only a limited decrease in earnings compared to most other companies of late, Archer-Daniels-Midland has been doing relatively well. It might be that many expect the comparatively superior earnings performance to degrade substantially, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. In saying that, existing shareholders probably aren't pessimistic about the share price if the company's earnings continue outplaying the market.

Does Growth Match The Low P/E?

Archer-Daniels-Midland's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period has seen an excellent 160% overall rise in EPS, in spite of its uninspiring short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 15% each year as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 10% per annum, which paints a poor picture.

In light of this, it's understandable that Archer-Daniels-Midland's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Archer-Daniels-Midland's P/E?

Having almost fallen off a cliff, Archer-Daniels-Midland's share price has pulled its P/E way down as well. 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.

As we suspected, our examination of Archer-Daniels-Midland's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

You need to take note of risks, for example - Archer-Daniels-Midland has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

You might be able to find a better investment than Archer-Daniels-Midland. 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).

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.