What Emera Incorporated's (TSE:EMA) P/E Is Not Telling You

With a median price-to-earnings (or "P/E") ratio of close to 13x in Canada, you could be forgiven for feeling indifferent about Emera Incorporated's (TSE:EMA) P/E ratio of 12.1x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Emera has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Emera

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Emera's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 45% last year. EPS has also lifted 21% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.3% each year as estimated by the twelve analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.1% each year, which paints a poor picture.

With this information, we find it concerning that Emera is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Final Word

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 Emera currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Emera you should be aware of, and 1 of them is a bit concerning.

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.