International Petroleum Corporation's (TSE:IPCO) Share Price Is Matching Sentiment Around Its Earnings

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 16x, you may consider International Petroleum Corporation (TSE:IPCO) as an attractive investment with its 10x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for International Petroleum as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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.

See our latest analysis for International Petroleum

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

Is There Any Growth For International Petroleum?

The only time you'd be truly comfortable seeing a P/E as low as International Petroleum's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 1,779% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 7.2% each year as estimated by the seven analysts watching the company. That's not great when the rest of the market is expected to grow by 8.9% per year.

With this information, we are not surprised that International Petroleum 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

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.

We've established that International Petroleum maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for International Petroleum that you should be aware of.

You might be able to find a better investment than International Petroleum. 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.