When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Vital Energy, Inc. (NYSE:VTLE) as a highly attractive investment with its 3.1x P/E ratio.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.  

With earnings that are retreating more than the market's of late, Vital Energy has been very sluggish.   The P/E is probably low because investors think this poor earnings performance isn't going to improve at all.  You'd much rather the company wasn't bleeding earnings if you still believe in the business.  Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.    

NYSE:VTLE Price to Earnings Ratio vs Industry June 4th 2024

Want the full picture on analyst estimates for the company? Then our free report on Vital Energy will help you uncover what's on the horizon.  

What Are Growth Metrics Telling Us About The Low P/E?  

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 59%.   This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total.  Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.  

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 23% per year over the next three years.  Meanwhile, the broader market is forecast to expand by 9.9% each year, which paints a poor picture.

In light of this, it's understandable that Vital Energy's P/E would sit below the majority of other companies.  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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Vital Energy'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.    

Before you settle on your opinion, we've discovered 5 warning signs for Vital Energy (3 are potentially serious!) that you should be aware of.  

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.