InPlay Oil Corp. (TSE:IPO) Stock Catapults 29% Though Its Price And Business Still Lag The Market

InPlay Oil Corp. (TSE:IPO) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. The annual gain comes to 279% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 11x, you may still consider InPlay Oil as a highly attractive investment with its 2.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

InPlay Oil 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for InPlay Oil

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

Is There Any Growth For InPlay Oil?

In order to justify its P/E ratio, InPlay Oil would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 111%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 24% as estimated by the lone analyst watching the company. That's not great when the rest of the market is expected to grow by 13%.

With this information, we are not surprised that InPlay Oil 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

Shares in InPlay Oil are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 InPlay Oil 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.

It is also worth noting that we have found 3 warning signs for InPlay Oil (2 don't sit too well with us!) that you need to take into consideration.

If these risks are making you reconsider your opinion on InPlay Oil, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.