Kosmos Energy Ltd.'s (NYSE:KOS) Shares Not Telling The Full Story

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Kosmos Energy Ltd. (NYSE:KOS) as an attractive investment with its 13.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings that are retreating more than the market's of late, Kosmos Energy has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Kosmos Energy

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

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a frustrating 29% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 30% per year over the next three years. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.

In light of this, it's peculiar that Kosmos Energy's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

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 Kosmos Energy currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Kosmos Energy, and understanding these should be part of your investment process.

You might be able to find a better investment than Kosmos Energy. 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.