When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Entergy Corporation (NYSE:ETR) as an attractive investment with its 9.7x P/E ratio.  Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.  

Recent times have been pleasing for Entergy as its earnings have risen in spite of the market's earnings going into reverse.   It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.    

NYSE:ETR Price to Earnings Ratio vs Industry April 24th 2024

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Entergy.

Does Growth Match The Low P/E?  

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

If we review the last year of earnings growth, the company posted a terrific increase of 106%.   The strong recent performance means it was also able to grow EPS by 59% in total over the last three years.  Therefore, it's fair to say the earnings growth recently has been superb for the company.  

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 9.1%  per annum as estimated by the analysts watching the company.  That's not great when the rest of the market is expected to grow by 11% per year.

With this information, we are not surprised that Entergy is trading at a P/E lower than the market.  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.

As we suspected, our examination of Entergy'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.  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 4 warning signs for Entergy (2 are potentially serious!) that you need to be mindful of.  

If these risks are making you reconsider your opinion on Entergy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.