With a price-to-earnings (or "P/E") ratio of 2.7x Peabody Energy Corporation (NYSE:BTU) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.  

Peabody Energy could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth.   The P/E is probably low because investors think this poor earnings performance isn't going to get any better.  If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.    

View our latest analysis for Peabody Energy

NYSE:BTU Price to Earnings Ratio vs Industry December 25th 2023

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

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

There's an inherent assumption that a company should far underperform the market for P/E ratios like Peabody Energy's to be considered reasonable.  

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago.   Likewise, not much has changed from three years ago as earnings have been stuck during that whole time.  Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.  

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 32% per year over the next three years.  Meanwhile, the broader market is forecast to expand by 13% per annum, which paints a poor picture.

In light of this, it's understandable that Peabody Energy'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 Bottom Line On Peabody Energy's P/E

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 Peabody Energy's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E.  At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio.  Unless these conditions improve, they will continue to form a barrier for the share price around these levels.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for Peabody Energy that you need to be mindful of.  

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.  

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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.