Lacklustre Performance Is Driving Precision Drilling Corporation's (TSE:PD) Low P/E

With a price-to-earnings (or "P/E") ratio of 4.8x Precision Drilling Corporation (TSE:PD) may be sending very bullish signals at the moment, given that almost half of all companies in Canada have P/E ratios greater than 15x and even P/E's higher than 32x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Precision Drilling as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Precision Drilling

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

Is There Any Growth For Precision Drilling?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 59% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 5.4% each year during the coming three years according to the ten analysts following the company. That's not great when the rest of the market is expected to grow by 8.4% each year.

In light of this, it's understandable that Precision Drilling's P/E would sit below the majority of other companies. 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 Bottom Line On Precision Drilling's P/E

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.

We've established that Precision Drilling 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Precision Drilling (of which 1 makes us a bit uncomfortable!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.