Improved Earnings Required Before Denbury Inc. (NYSE:DEN) Shares Find Their Feet

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 15x, you may consider Denbury Inc. (NYSE:DEN) as an attractive investment with its 8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Denbury as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for Denbury

Want the full picture on analyst estimates for the company? Then our free report on Denbury will help you uncover what's on the horizon.

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

In order to justify its P/E ratio, Denbury would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 356% gain to the company's bottom line. Pleasingly, EPS has also lifted 1,592% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 19% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 11% per year, which paints a poor picture.

In light of this, it's understandable that Denbury's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Denbury's 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Denbury.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.