Spark New Zealand Limited's (NZSE:SPK) Low P/E No Reason For Excitement

Spark New Zealand Limited's (NZSE:SPK) price-to-earnings (or "P/E") ratio of 8.2x might make it look like a buy right now compared to the market in New Zealand, where around half of the companies have P/E ratios above 16x and even P/E's above 30x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Spark New Zealand as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View 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.

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 Spark New Zealand's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 177% last year. The strong recent performance means it was also able to grow EPS by 174% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings growth is heading into negative territory, declining 23% per year over the next three years. With the market predicted to deliver 21% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that Spark New Zealand's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Spark New Zealand's analyst forecasts revealed that its outlook for shrinking earnings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Spark New Zealand (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

You might be able to find a better investment than Spark New Zealand. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.