Improved Earnings Required Before Cardinal Energy Ltd. (TSE:CJ) Shares Find Their Feet

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 15x, you may consider Cardinal Energy Ltd. (TSE:CJ) as an attractive investment with its 9.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Cardinal Energy has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Cardinal Energy

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

How Is Cardinal Energy's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 76% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 31% over the next year. Meanwhile, the broader market is forecast to expand by 20%, which paints a poor picture.

With this information, we are not surprised that Cardinal Energy 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 Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Cardinal Energy's 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Cardinal Energy (2 are potentially serious) you should be aware of.

You might be able to find a better investment than Cardinal 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.