Nasdaq
華爾街日報Enwell Energy plc's (LON:ENW) Shares Bounce 27% But Its Business Still Trails The Market
Enwell Energy plc (LON:ENW) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 9.9% isn't as attractive.
In spite of the firm bounce in price, given about half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 16x, you may still consider Enwell Energy as an attractive investment with its 9.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
As an illustration, earnings have deteriorated at Enwell Energy over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you 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.
See our latest analysis for Enwell Energy
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Enwell Energy's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 63% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 86% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 19% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's understandable that Enwell Energy's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. 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 Enwell Energy's P/E
Enwell Energy's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Enwell Energy revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term 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 2 warning signs for Enwell Energy that we have uncovered.
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.