Epsilon Energy Ltd.'s (NASDAQ:EPSN) P/E Is On The Mark

Epsilon Energy Ltd.'s (NASDAQ:EPSN) price-to-earnings (or "P/E") ratio of 27.1x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Epsilon Energy could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Epsilon Energy

Keen to find out how analysts think Epsilon Energy's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Epsilon Energy?

In order to justify its P/E ratio, Epsilon Energy would need to produce impressive growth in excess of 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 60%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 13% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 43% over the next year. That's shaping up to be materially higher than the 15% growth forecast for the broader market.

With this information, we can see why Epsilon Energy is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of Epsilon Energy's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Epsilon Energy (of which 2 are concerning!) you should know about.

If these risks are making you reconsider your opinion on Epsilon Energy, 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.