Little Excitement Around Magnolia Oil & Gas Corporation's (NYSE:MGY) Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may consider Magnolia Oil & Gas Corporation (NYSE:MGY) as an attractive investment with its 12.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, Magnolia Oil & Gas' 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 you still 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.

Check out our latest analysis for Magnolia Oil & Gas

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

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

The only time you'd be truly comfortable seeing a P/E as low as Magnolia Oil & Gas' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 5.8% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 48% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 7.8% each year as estimated by the analysts watching the company. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Magnolia Oil & Gas is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Magnolia Oil & Gas' 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.

As we suspected, our examination of Magnolia Oil & Gas' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Magnolia Oil & Gas with six simple checks will allow you to discover any risks that could be an issue.

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.