Goodrich Petroleum Corporation’s (NYSEMKT:GDP) price-to-earnings (or “P/E”) ratio of 6.4x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E’s above 38x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Recent times have been pleasing for Goodrich Petroleum as its earnings have risen in spite of the market’s earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.free report is a great place to start.
What Are Growth Metrics Telling Us About The Low P/E?
Goodrich Petroleum’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 an exceptional 99% gain to the company’s bottom line. EPS has also lifted 21% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 62% over the next year. That’s not great when the rest of the market is expected to grow by 2.2%.
In light of this, it’s understandable that Goodrich Petroleum’s P/E would sit below the majority of other companies. Nonetheless, there’s no guarantee the P/E has reached a floor yet with earnings going in reverse. 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 Goodrich Petroleum’s P/E?
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We’ve established that Goodrich Petroleum maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. It’s hard to see the share price rising strongly in the near future under these circumstances.
Before you settle on your opinion, we’ve discovered 2 warning signs for Goodrich Petroleum (1 doesn’t sit too well with us!) that you should be aware of.
Of course, you might also be able to find a better stock than Goodrich Petroleum. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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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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