4 ASX stocks in the P/E Red Zone

It's one of the more popular tools used to calculate the value of a stock and arguably the go-to shorthand for measuring whether a particular stock is under- or overvalued.

The humble P/E ratio (price-to-earnings) has been a mainstay of fundamental analysis for decades and is used by many investors as a way to find underpriced gems or avoid expensive mistakes. 

But if you look at a list of companies with the highest P/E ratio, you’ll often encounter stocks with an unearthly valuation, a P/E in the hundreds, if not thousands.

In this wire, we’re taking a look at stocks in the P/E “red zone” – defined as large caps trading at a trailing P/E that’s more than 500% its five-year average. 

Conventional wisdom might suggest these would be stocks to avoid.

But as we'll point out below, there are clear flaws to using P/E as a measure of a stock's value, especially if used in isolation or taken without context. 

Here are some of the stocks currently in the red zone, and the legitimate reasons why they currently find themselves there. 

One-off costs

Global metal and electronics recycler Sims and Africa-based gold miner Resolute stand out as two names trading at abnormal P/Es of 1,362 and 96 respectively, but the move largely reflects one-off costs.

Sims Ltd (ASX: SGM)

At a current P/E of 1,362, it's now a whopping 13,350% above its 5-year P/E average of 10.1, despite the SGM share price only being up 11% in 2025.

Sims has been operating in a challenging market, where prices for key inputs, like ferrous metals, have been in a steady decline over the past couple of years. 

Its latest FY25 result included $80.7 million in one-off significant items, relating to the closure of SRR business, asset impairments, and redundancy and restructuring costs.

This results in relatively normal top line and underlying figures, but abnormal statutory numbers.

• Sales revenue up 4.1% to $7.49 billion
• Statutory EBITDA down 10.5% to $323.7 million
• Underlying EBITDA up 48.1% to $430.0 million
• Statutory NPAT of $2.4 million
• Underlying NPAT of $83.1 million

On an underlying basis, Sims is trading at a PE of 30x. And its forward P/E, which is calculated based on projected future earnings, is around 13. 

Macquarie remains upbeat on Sims, with an Outperform rating. "While earnings momentum could be disrupted near term, the US steel market fundamentals remain positive and SAR and NAM should capitalise,” the analysts said in a note.

Resolute (ASX: RSG)

The narrative is much the same for Resolute, which has typically traded at a mid-to-high single digit P/E. Instead, the Australian miner currently has a P/E ratio of 95.5, 1,403% above its 5-year average P/E of 6.4.

Its recent FY25 result showed a huge reduction in NPAT to $13.28 million, down from $91.53 million.

While EBITDA doubled year-on-year in FY25 to $320 million, RSG incurred $167.6 million in other costs, including indirect tax incurred in Mali and Senegal, as well as depreciation and amortisation costs of $127 million. 

It means Resolute's EPS is temporarily elevated while those results remain part of its earnings calculations. By comparison, its forward P/E is a modest 4.66. 

But while its highly elevated P/E can be explained away, it was enough for Macquarie to downgrade Resolute to neutral, largely due to its recent share price run.

"1HCY25 earnings were impacted by higher depreciation, while FCF was lower due to capex. RSG retained full-year guidance. Strong share price performance against no material changes to our forecasts (including Mali risk, reflected in our WACC) sees us downgrade to Neutral."

Entering profitability

DroneShield (ASX: DRO)

Anti-drone technology company DroneShield currently has a trailing P/E of 373.

But again, there's a fairly straightforward explanation for why it finds itself in the red zone and why it's hard to use this as evidence that it's massively overvalued. 

In its recent results, DRO reported an H1 25 NPAT of $1.2 million, the first time it has hit profitability, and a clear improvement (~480% year-on-year) on the $4.8 million loss it reported a year earlier. 

It has also seen its share price rocket almost 400% this year alone, resulting in a huge displacement in its price-to-earnings ratio. 

As should be clear by now, this elevated figure doesn't necessarily suggest DroneShield is unsustainably overvalued. 

Its forward P/E is 112, still elevated, but not unfathomable for a newly profitable growth stock with a clear growth trajectory.

Bell Potter, for example, retained its Buy rating, and said "DRO’s 1H25 performance demonstrates the significant growth that has occurred in the business in CY25, including the acceleration of both the scale and frequency of contracts."

Heavy capex

Lynas Rare Earths (ASX: LYC)

Rare earths miner Lynas is the last stock in the P/E red zone, with a current ratio of 1,690, which puts it 508% above its 5-year average of 277.6.

As with other stocks on this list, a large drop in FY25 NPAT year-on-year played a big role in LYC's outsized P/E.

It recorded an NPAT of $7.99 million, down from $84.51 million in FY24, as a result of higher costs and capex, including the Mt Weld expansion, as well as lower prices for neodymium and praseodymium (NdPr).

A 154% surge in the LYC share price this year has also contributed, but again, it doesn't necessarily mean Lynas is a screaming sell. 

Like the other stocks on this list, it has a more reasonable forward P/E of 45. 

Morgan Stanley retained its Overweight rating, writing "LYC has strategic value in a multipolar world, positioned to benefit from the establishment of an ex-China rare earths supply chain after recent trade tensions highlighted vulnerabilities."

In summary

There's always an explanation for even the most extreme P/Es, especially if they buck a company's long-term average. 

And while it remains a handy shorthand measure of a stock's relative value, it can't be taken as gospel. 

Hopefully, these (admittedly extreme) case studies have helped illustrate that point.