Magnolia Oil & Gas Corporation's (NYSE:MGY) Earnings Are Not Doing Enough For Some Investors

With a price-to-earnings (or "P/E") ratio of 7.5x Magnolia Oil & Gas Corporation (NYSE:MGY) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings that are retreating more than the market's of late, Magnolia Oil & Gas has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Magnolia Oil & Gas

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Magnolia Oil & Gas.

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

In order to justify its P/E ratio, Magnolia Oil & Gas would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 4.6% each year over the next three years. That's shaping up to be materially lower than the 12% each year growth forecast for the broader market.

With this information, we can see why Magnolia Oil & Gas is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

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 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.

Before you take the next step, you should know about the 1 warning sign for Magnolia Oil & Gas that we have uncovered.

You might be able to find a better investment than Magnolia Oil & Gas. 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.