It's A Story Of Risk Vs Reward With BP p.l.c. (LON:BP.)

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may consider BP p.l.c. (LON:BP.) as an attractive investment with its 10.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

BP could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

View our latest analysis for BP

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

Is There Any Growth For BP?

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

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that BP's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that BP currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you settle on your opinion, we've discovered 2 warning signs for BP that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.

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