Petrus Resources Ltd.'s (TSE:PRQ) Business And Shares Still Trailing The Market
With a price-to-earnings (or "P/E") ratio of 2.8x Petrus Resources Ltd. (TSE:PRQ) may be sending very bullish signals at the moment, given that almost half of all companies in Canada have P/E ratios greater than 12x and even P/E's higher than 26x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times haven't been advantageous for Petrus Resources as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
View our latest analysis for Petrus Resources
Want the full picture on analyst estimates for the company? Then our free report on Petrus Resources will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Petrus Resources' is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 68% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to slump, contracting by 47% during the coming year according to the sole analyst following the company. With the market predicted to deliver 12% growth , that's a disappointing outcome.
In light of this, it's understandable that Petrus Resources' 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.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Petrus Resources' 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.
Before you take the next step, you should know about the 2 warning signs for Petrus Resources (1 makes us a bit uncomfortable!) 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 low P/E.
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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.
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