The Market Doesn't Like What It Sees From Naftna Industrija Srbije a.d.'s (BELEX:NIIS) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 5.5x Naftna Industrija Srbije a.d. (BELEX:NIIS) may be sending bullish signals at the moment, given that almost half of all companies in Serbia have P/E ratios greater than 9x and even P/E's higher than 12x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Naftna Industrija Srbije a.d could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor 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.

Check out our latest analysis for Naftna Industrija Srbije a.d

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Naftna Industrija Srbije a.d.

Is There Any Growth For Naftna Industrija Srbije a.d?

The only time you'd be truly comfortable seeing a P/E as low as Naftna Industrija Srbije a.d's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 51% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 7.9% per year over the next three years. Meanwhile, the broader market is forecast to expand by 13% per year, which paints a poor picture.

In light of this, it's understandable that Naftna Industrija Srbije a.d'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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Naftna Industrija Srbije a.d's P/E?

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.

We've established that Naftna Industrija Srbije a.d maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

You need to take note of risks, for example - Naftna Industrija Srbije a.d has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're unsure about the strength of Naftna Industrija Srbije a.d'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.