Improved Earnings Required Before Origin Materials, Inc. (NASDAQ:ORGN) Stock's 50% Jump Looks Justified

Origin Materials, Inc. (NASDAQ:ORGN) shares have had a really impressive month, gaining 50% after a shaky period beforehand. But the last month did very little to improve the 80% share price decline over the last year.

Even after such a large jump in price, Origin Materials may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.4x, since almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 32x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Origin Materials has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Origin Materials

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

How Is Origin Materials' Growth Trending?

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

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 70%. 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. 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 one analyst covering the company suggest earnings growth is heading into negative territory, declining 329% over the next year. Meanwhile, the broader market is forecast to expand by 12%, which paints a poor picture.

With this information, we are not surprised that Origin Materials is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Origin Materials' P/E

Origin Materials' recent share price jump still sees its P/E sitting firmly flat on the ground. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Origin Materials' 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 4 warning signs we've spotted with Origin Materials (including 3 which are potentially serious).

You might be able to find a better investment than Origin Materials. 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.