PetroNor E&P ASA's (OB:PNOR) price-to-earnings (or "P/E") ratio of 2.6x 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 12x and even P/E's above 20x 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.
As an illustration, earnings have deteriorated at PetroNor E&P over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
View our latest analysis for PetroNor E&P
What Are Growth Metrics Telling Us About The Low P/E?
PetroNor E&P's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 505% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 28% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that PetroNor E&P's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that PetroNor E&P currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for PetroNor E&P that you should be aware of.
Of course, you might also be able to find a better stock than PetroNor E&P. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
About OB:PNOR
PetroNor E&P
Operates as an independent oil and gas exploration and production company in countries offshore West Africa.
Flawless balance sheet and good value.
