Energy Services of America Corporation's (NASDAQ:ESOA) Price Is Right But Growth Is Lacking After Shares Rocket 26%

Energy Services of America Corporation (NASDAQ:ESOA) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 99% in the last year.

In spite of the firm bounce in price, Energy Services of America's price-to-earnings (or "P/E") ratio of 12.1x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 17x and even P/E's above 33x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Energy Services of America certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Energy Services of America

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

Is There Any Growth For Energy Services of America?

There's an inherent assumption that a company should underperform the market for P/E ratios like Energy Services of America's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 94% gain to the company's bottom line. Pleasingly, EPS has also lifted 190% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 19% during the coming year according to the only analyst following the company. With the market predicted to deliver 10% growth , that's a disappointing outcome.

With this information, we are not surprised that Energy Services of America is trading at a P/E lower than the market. 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 Key Takeaway

Despite Energy Services of America's shares building up a head of steam, its P/E still lags most other companies. 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 Energy Services of America'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Energy Services of America (1 is a bit concerning) you should be aware of.

You might be able to find a better investment than Energy Services of America. 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.