Investors Aren't Entirely Convinced About Peyto Exploration & Development Corp.'s (TSE:PEY) Earnings
Peyto Exploration & Development Corp.'s (TSE:PEY) price-to-earnings (or "P/E") ratio of 10x might make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 16x and even P/E's above 39x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
While the market has experienced earnings growth lately, Peyto Exploration & Development's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for Peyto Exploration & Development
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Peyto Exploration & Development.
Is There Any Growth For Peyto Exploration & Development?
There's an inherent assumption that a company should underperform the market for P/E ratios like Peyto Exploration & Development's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 62% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 63% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 26% per year as estimated by the dual analysts watching the company. That's shaping up to be similar to the 29% per year growth forecast for the broader market.
In light of this, it's peculiar that Peyto Exploration & Development's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
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.
We've established that Peyto Exploration & Development currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
Before you take the next step, you should know about the 5 warning signs for Peyto Exploration & Development (2 can't be ignored!) that we have uncovered.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E 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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