Investors Don't See Light At End Of Petrus Resources Ltd.'s (TSE:PRQ) Tunnel

Petrus Resources Ltd.'s (TSE:PRQ) price-to-earnings (or "P/E") ratio of 2.5x might make it look like a strong buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 12x and even P/E's above 26x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Petrus Resources 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. 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 Petrus Resources

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

How Is Petrus Resources' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 68% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. 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 47% during the coming year according to the sole analyst following the company. That's not great when the rest of the market is expected to grow by 11%.

In light of this, it's understandable that Petrus Resources' 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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.

As we suspected, our examination of Petrus Resources' 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Petrus Resources (1 doesn't sit too well with us) you should be aware of.

If you're unsure about the strength of Petrus Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.