Improved Earnings Required Before GeoPark Limited (NYSE:GPRK) Shares Find Their Feet

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider GeoPark Limited (NYSE:GPRK) as a highly attractive investment with its 3.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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While the market has experienced earnings growth lately, GeoPark's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for GeoPark

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

Does Growth Match The Low P/E?

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

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 6.0%. Still, the latest three year period has seen an excellent 88% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.1% per annum as estimated by the four analysts watching the company. With the market predicted to deliver 11% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that GeoPark's P/E would sit below the majority of other companies. 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

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.

We've established that GeoPark maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Before you take the next step, you should know about the 3 warning signs for GeoPark (1 is a bit unpleasant!) that we have uncovered.

Of course, you might also be able to find a better stock than GeoPark. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.