The 38% decline of the Fortescue Ltd (ASX: FMG) share price since the beginning of 2024 has pushed down the iron ore miner's price/earnings (P/E) ratio.
The lower the share price, the better value a company becomes and the more appealing a P/E ratio can seem. Miners typically trade on lower earnings multiples than industries like retailers or technology, so we should expect the P/E ratio to be relatively low.
At certain times, the valuation can seem extremely attractive. As we can see on the chart below, it's been a rough year for the mining company.
With that decline in mind, let's look at how appealing the current Fortescue earnings multiple is.
Fortescue share price P/E ratio
In the 2024 financial year, Fortescue reported that it generated US$5.66 billion of net profit after tax (NPAT), which represented an increase of 18% year over year. The ASX mining share's underlying net profit rose by 3% to US$5.66 billion.
In earnings per share (EPS) terms, the company's EPS increased 3% in US dollar terms to U$1.85 and 6% in Australian dollar terms to A$2.82.
That means the current Fortescue share has a price/earnings ratio of just over 6. That's very low and seems appealing.
However, investors should remember that the ASX share market is forward-looking. We need to focus on what profit the business may make in the next result, not the last one.
For some companies, like Wesfarmers Ltd (ASX: WES) and Coles Group Ltd (ASX: COL), profit is usually stable and similar year to year. But, ASX mining shares can see wild profit swings over a 12-month period, depending on what happens with resource prices. We shouldn't assume last year's profit will be similar to this year's.
What could the profit be in FY25?
Fortescue is extremely reliant on the iron ore price for its own profitability.
According to Trading Economics, the iron ore price has dropped again to approximately US$100 per tonne due to ongoing weakness in the Chinese property sector, which is a key factor in the country's steel consumption.
Trading Economics reported that the latest data from China showed that property investment in China dropped by 10.3% in the first 10 months of the year. In October, new home prices saw the largest decline in more than nine years.
These declines are happening despite China's finance ministry recently revealing tax incentives for home and land transactions to try to support the sector, but the move "failed to spark investor optimism", according to Trading Economics.
On the supply side, Australian iron ore shipments continue to grow, and Chinese port iron ore inventory has been growing, driven by restocking from portside traders, as reported by Trading Economics.
Amid all of this, it's not a surprise that analysts expect Fortescue's net profit to decline in the coming years.
The broker UBS is forecasting Fortescue could make US$3.7 billion of net profit, which would represent a fall of roughly 35%. It would also mean the Fortescue share price is valued at just under 10x FY25's estimated earnings. It's not as cheap as a P/E ratio of 6, but still somewhat low for a miner.
Is it attractive? It depends on what happens next with the iron ore price – will the commodity fall further or recover?
Buying Fortescue shares isn't the sort of investment I'd want to make right now, at this price, particularly with the possibility of Trump tariffs on China in 2025 and onwards.
