Why Investors Shouldn't Be Surprised By OKEA ASA's (OB:OKEA) Low P/E

OKEA ASA's (OB:OKEA) price-to-earnings (or "P/E") ratio of 3.7x might make it look like a strong buy right now compared to the market in Norway, where around half of the companies have P/E ratios above 11x and even P/E's above 21x 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.

OKEA could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for OKEA

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

Is There Any Growth For OKEA?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.4% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 1.2% per annum as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 23% per year growth forecast for the broader market.

In light of this, it's understandable that OKEA's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As we suspected, our examination of OKEA's analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with OKEA.

If these risks are making you reconsider your opinion on OKEA, 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. 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.