Elinoil Hellenic Petroleum Company S.A. (ATH:ELIN) Looks Cheap But Not Cheerful

By
Simply Wall St
Published
July 20, 2020
ATSE:ELIN

When close to half the companies in Greece have price-to-earnings ratios (or "P/E's") above 16x, you may consider Elinoil Hellenic Petroleum Company S.A. (ATH:ELIN) as an attractive investment with its 11x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

The earnings growth achieved at Elinoil Hellenic Petroleum over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Elinoil Hellenic Petroleum

How Does Elinoil Hellenic Petroleum's P/E Ratio Compare To Its Industry Peers?

It's plausible that Elinoil Hellenic Petroleum's low P/E ratio could be a result of tendencies within its own industry. It turns out the Oil and Gas industry in general also has a P/E ratio lower than the market, as the graphic below shows. So this certainly goes a fair way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Oil and Gas industry. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

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ATSE:ELIN Price Based on Past Earnings July 21st 2020
Although there are no analyst estimates available for Elinoil Hellenic Petroleum, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

Elinoil Hellenic Petroleum's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. Still, incredibly EPS has fallen 32% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to decline by 2.7% over the next year, or less than the company's recent medium-term annualised earnings decline.

In light of this, it's understandable that Elinoil Hellenic Petroleum's P/E sits below the majority of other companies. However, when earnings shrink rapidly P/E often shrinks too, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent earnings trends are already weighing down the shares heavily.

The Bottom Line On Elinoil Hellenic Petroleum's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Elinoil Hellenic Petroleum maintains its low P/E on the weakness of its recentthree-year earnings being even worse than the forecasts for a struggling market, 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. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader market turmoil. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Elinoil Hellenic Petroleum (1 is a bit concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Elinoil Hellenic Petroleum, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. 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.
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