There Is A Reason Athabasca Oil Corporation's (TSE:ATH) Price Is Undemanding

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 17x, you may consider Athabasca Oil Corporation (TSE:ATH) as a highly attractive investment with its 6.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Athabasca Oil certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

View our latest analysis for Athabasca Oil

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

How Is Athabasca Oil's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 120% last year. EPS has also lifted 14% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 51% over the next year. Meanwhile, the broader market is forecast to expand by 24%, which paints a poor picture.

With this information, we are not surprised that Athabasca Oil 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.

The Key Takeaway

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 Athabasca Oil's analyst forecasts revealed that its outlook for shrinking earnings 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. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Athabasca Oil (1 is a bit unpleasant!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Athabasca Oil. 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.