Risks To Shareholder Returns Are Elevated At These Prices For Spark New Zealand Limited (NZSE:SPK)

With a median price-to-earnings (or "P/E") ratio of close to 19x in New Zealand, you could be forgiven for feeling indifferent about Spark New Zealand Limited's (NZSE:SPK) P/E ratio of 20.5x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Spark New Zealand has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Spark New Zealand

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Spark New Zealand.

How Is Spark New Zealand's Growth Trending?

The only time you'd be comfortable seeing a P/E like Spark New Zealand's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 54%. The last three years don't look nice either as the company has shrunk EPS by 53% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 22% each year, which is noticeably more attractive.

With this information, we find it interesting that Spark New Zealand is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Spark New Zealand's P/E

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.

Our examination of Spark New Zealand's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Spark New Zealand you should be aware of, and 1 of them doesn't sit too well with us.

If you're unsure about the strength of Spark New Zealand's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.