Horizon Oil Limited (ASX: HZN) Shareholders won’t be happy to see that the stock price has had a very difficult month, falling 29% and reversing the positive performance of the previous period. Looking at the big picture, even after this bad month, the stock is up 39% last year.

Following the sharp drop in prices, Horizon Oil could send bullish signals right now with its price-to-earnings (or “P / E”) ratio of 16.3x, as nearly half of all companies in Australia have P / E ratios. greater than 19x and even P / E greater than 38x are not unusual. However, it is not wise to just take the P / E at face value as there may be an explanation why it is limited.

As an illustration, profits have deteriorated at Horizon Oil over the past year, which is not at all ideal. One possibility is that the P / E is weak because investors believe the company will not do enough to avoid underperforming the broader market in the near future. However, if this does not happen, existing shareholders could be optimistic about the future direction of the share price.

Check out our latest review for Horizon Oil

While there are no analyst estimates available for Horizon Oil, take a look at this free a data-rich visualization to see how the business compares to profit, revenue, and cash flow.

Is there any growth for Horizon Oil?

There is an inherent assumption that a company would have to underperform the market for P / E ratios like that of Horizon Oil to be considered reasonable.

Looking back first, the growth in earnings per share of the company last year was not thrilled as it posted a disappointing 71% decline. Sadly, that brought him back to where he started three years ago, with BPA growth mostly non-existent during that time. Thus, shareholders would probably not have been too happy with the volatility of growth rates in the medium term.

This contrasts with the rest of the market, which is expected to grow 18% over the next year, significantly higher than the company’s recent mid-term annualized growth rates.

With this information, we can see why Horizon Oil is trading at a lower P / E than the market. Apparently, many shareholders weren’t comfortable hanging on to something that they believed will continue to follow the stock market.

The final result on the P / E of Horizon Oil

The softening of Horizon Oil stocks means that its P / E is now at a fairly low level. We would say that the power of the price / earnings ratio is not primarily as a valuation instrument, but rather to assess current investor sentiment and future expectations.

We have determined that Horizon Oil maintains its low P / E on the weakness of its recent three-year growth being below the broader market forecast, as expected. Right now, shareholders are accepting the low P / E as they admit that future earnings are unlikely to provide any good surprises. If recent mid-term earnings trends continue, it is difficult to see the stock price rise sharply in the near future under these circumstances.

It is always necessary to consider the ever-present specter of investment risk. We have identified 5 warning signs with Horizon Oil, and understanding them should be part of your investment process.

If you are uncertain about the strength of Horizon Oil’s business, why not explore our interactive list of stocks with solid trading fundamentals for other companies that you may have missed.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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