Improved Earnings Required Before STEP Energy Services Ltd. (TSE:STEP) Shares Find Their Feet

STEP Energy Services Ltd.'s (TSE:STEP) price-to-earnings (or "P/E") ratio of 4.4x 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 14x and even P/E's above 30x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

While the market has experienced earnings growth lately, STEP Energy Services' earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

Check out our latest analysis for STEP Energy Services

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

Is There Any Growth For STEP Energy Services?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 33%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 1.3% per annum during the coming three years according to the six analysts following the company. With the market predicted to deliver 9.3% growth per year, that's a disappointing outcome.

In light of this, it's understandable that STEP Energy Services' 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 Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that STEP Energy Services 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.

Before you take the next step, you should know about the 2 warning signs for STEP Energy Services (1 is significant!) that we have uncovered.

If you're unsure about the strength of STEP Energy Services' 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.

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