Insufficient Growth At Avista Corporation (NYSE:AVA) Hampers Share Price

Avista Corporation's (NYSE:AVA) price-to-earnings (or "P/E") ratio of 15.4x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 35x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Avista as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

How Is Avista's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. EPS has also lifted 16% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 3.8% each year as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader market.

With this information, we can see why Avista 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.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Avista's analyst forecasts revealed that its inferior earnings outlook 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.

Before you take the next step, you should know about the 3 warning signs for Avista (1 is a bit unpleasant!) that we have uncovered.

If these risks are making you reconsider your opinion on Avista, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.