Investors Aren't Buying NuVista Energy Ltd.'s (TSE:NVA) Earnings

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 14x, you may consider NuVista Energy Ltd. (TSE:NVA) as a highly attractive investment with its 5.4x 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.

NuVista Energy has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for NuVista Energy

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

Is There Any Growth For NuVista Energy?

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

Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 4.1% during the coming year according to the dual analysts following the company. With the market predicted to deliver 13% growth , that's a disappointing outcome.

In light of this, it's understandable that NuVista Energy's P/E would sit below the majority of other companies. 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.

What We Can Learn From NuVista Energy's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that NuVista Energy 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.

Plus, you should also learn about these 2 warning signs we've spotted with NuVista Energy (including 1 which can't be ignored).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.