Investors Don't See Light At End Of New Zealand Oil & Gas Limited's (NZSE:NZO) Tunnel

With a price-to-earnings (or "P/E") ratio of 10.3x New Zealand Oil & Gas Limited (NZSE:NZO) may be sending bullish signals at the moment, given that almost half of all companies in New Zealand have P/E ratios greater than 17x and even P/E's higher than 30x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For instance, New Zealand Oil & Gas' receding earnings in recent times would have to be some food for thought. 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.

Check out our latest analysis for New Zealand Oil & Gas

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on New Zealand Oil & Gas' earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as low as New Zealand Oil & Gas' is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 6.3% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why New Zealand Oil & Gas is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On New Zealand Oil & Gas' P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of New Zealand Oil & Gas revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for New Zealand Oil & Gas that you should be aware of.

If these risks are making you reconsider your opinion on New Zealand Oil & Gas, 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.