The Market Doesn't Like What It Sees From Origin Energy Limited's (ASX:ORG) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 14.3x Origin Energy Limited (ASX:ORG) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 21x and even P/E's higher than 39x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent times haven't been advantageous for Origin Energy as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Origin Energy

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Origin Energy.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Origin Energy's to be considered reasonable.

Retrospectively, the last year delivered a decent 6.3% gain to the company's bottom line. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings growth is heading into negative territory, declining 6.6% per annum over the next three years. With the market predicted to deliver 16% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Origin Energy is trading at a P/E lower than the market. 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 Key Takeaway

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 Origin Energy's 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.

Having said that, be aware Origin Energy is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

You might be able to find a better investment than Origin Energy. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.