Improved Earnings Required Before Secure Energy Services Inc. (TSE:SES) Stock's 31% Jump Looks Justified

The Secure Energy Services Inc. (TSE:SES) share price has done very well over the last month, posting an excellent gain of 31%. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Secure Energy Services may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.2x, since 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 pleasing for Secure Energy Services as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.

View our latest analysis for Secure Energy Services

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

How Is Secure Energy Services' Growth Trending?

Secure Energy Services' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 306%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. 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 three years should bring diminished returns, with earnings decreasing 18% per annum as estimated by the five analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.0% per year, which paints a poor picture.

With this information, we are not surprised that Secure Energy Services 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.

What We Can Learn From Secure Energy Services' P/E?

Secure Energy Services' recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of Secure Energy Services' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 2 warning signs for Secure Energy Services 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.