Why Investors Shouldn't Be Surprised By ARC Resources Ltd.'s (TSE:ARX) Low P/E

ARC Resources Ltd.'s (TSE:ARX) price-to-earnings (or "P/E") ratio of 6.7x might make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 14x and even P/E's above 27x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate ARC Resources' and the market's retreating earnings lately. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.

See our latest analysis for ARC Resources

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

What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.7%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 18% as estimated by the dual analysts watching the company. Meanwhile, the broader market is forecast to expand by 13%, which paints a poor picture.

With this information, we are not surprised that ARC Resources is trading at a P/E lower than the market. 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.

The Bottom Line On ARC Resources' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of ARC Resources' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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 take the next step, you should know about the 2 warning signs for ARC Resources (1 is a bit concerning!) that we have uncovered.

If you're unsure about the strength of ARC Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.