Earnings Working Against Westport Fuel Systems Inc.'s (TSE:WPRT) Share Price

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 12x, you may consider Westport Fuel Systems Inc. (TSE:WPRT) as an attractive investment with its 7.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Westport Fuel Systems certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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.

View our latest analysis for Westport Fuel Systems

Keen to find out how analysts think Westport Fuel Systems' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Westport Fuel Systems' Growth Trending?

Westport Fuel Systems' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 330%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 29% each year as estimated by the seven analysts watching the company. With the market predicted to deliver 14% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Westport Fuel Systems 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 Bottom Line On Westport Fuel Systems' P/E

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.

We've established that Westport Fuel Systems maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Westport Fuel Systems has 2 warning signs (and 1 which is significant) we think you should know about.

You might be able to find a better investment than Westport Fuel Systems. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.