When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider MDU Resources Group, Inc. (NYSE:MDU) as a highly attractive investment with its 7.6x 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 growth that's superior to most other companies of late, MDU Resources Group has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for MDU Resources Group

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as MDU Resources Group's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 127% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 40% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 38% as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 10%.

In light of this, it's understandable that MDU Resources Group's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that MDU Resources Group maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for MDU Resources Group you should be aware of, and 2 of them are concerning.

If you're unsure about the strength of MDU Resources Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.