- Oil and Gas
Insufficient Growth At Otto Energy Limited (ASX:OEL) Hampers Share Price
When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 16x, you may consider Otto Energy Limited (ASX:OEL) as a highly attractive investment with its 2.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
As an illustration, earnings have deteriorated at Otto Energy over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you 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.
See our latest analysis for Otto EnergyAlthough there are no analyst estimates available for Otto Energy, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
Otto Energy'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.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. 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. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 16% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it's understandable that Otto Energy's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Otto Energy revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
You need to take note of risks, for example - Otto Energy has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
Valuation is complex, but we're helping make it simple.
Find out whether Otto Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Otto Energy Limited, together with its subsidiaries, operates as an oil and gas exploration and production company in North America.
Flawless balance sheet and slightly overvalued.