Improved Earnings Required Before Southwestern Energy Company (NYSE:SWN) Shares Find Their Feet

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Southwestern Energy Company (NYSE:SWN) as a highly attractive investment with its 5.3x 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 so limited.

Recent times haven't been advantageous for Southwestern Energy as its earnings have been falling quicker than most other companies. 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.

View our latest analysis for Southwestern Energy

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

How Is Southwestern Energy's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Southwestern Energy's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 15% 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. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings growth is heading into negative territory, declining 4.5% each year over the next three years. That's not great when the rest of the market is expected to grow by 10% per year.

With this information, we are not surprised that Southwestern Energy is trading at a P/E lower than the market. 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.

What We Can Learn From Southwestern Energy's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Southwestern Energy'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Southwestern Energy that you should be aware of.

Of course, you might also be able to find a better stock than Southwestern Energy. 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.