Take Care Before Diving Into The Deep End On Civitas Resources, Inc. (NYSE:CIVI)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Civitas Resources, Inc. (NYSE:CIVI) as an attractive investment with its 9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Civitas Resources as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Civitas Resources

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

What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 38%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 57% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the six analysts watching the company. With the market only predicted to deliver 11% each year, the company is positioned for a stronger earnings result.

With this information, we find it odd that Civitas Resources is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Civitas Resources' 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 Civitas Resources' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for Civitas Resources that you should be aware of.

If you're unsure about the strength of Civitas Resources' 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.