California Resources Corporation's (NYSE:CRC) Price Is Right But Growth Is Lacking

California Resources Corporation's (NYSE:CRC) price-to-earnings (or "P/E") ratio of 6.4x might make it look like a strong 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 32x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for California Resources as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.

See our latest analysis for California Resources

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, California Resources would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 74% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 12% each year during the coming three years according to the three analysts following the company. That's not great when the rest of the market is expected to grow by 11% each year.

With this information, we are not surprised that California Resources 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

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 California Resources' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - California Resources has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on California Resources, 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.