With a price-to-earnings (or "P/E") ratio of 6.7x Northern Oil and Gas, Inc. (NYSE:NOG) 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 18x and even P/E's higher than 33x are not unusual.  However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.  

Recent times haven't been advantageous for Northern Oil and Gas as its earnings have been falling quicker than most other companies.   The P/E is probably low because investors think this poor earnings performance isn't going to improve at all.  If you still like the company, you'd want its earnings trajectory to turn around before making any decisions.  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:NOG Price to Earnings Ratio vs Industry May 12th 2024

Keen to find out how analysts think Northern Oil and Gas' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Northern Oil and Gas?  

In order to justify its P/E ratio, Northern Oil and Gas would need to produce anemic growth that's substantially trailing the market.  

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line.   At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth.  So it appears to us that the company has had a mixed result in terms of growing earnings over that time.  

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.2%  per annum as estimated by the eight analysts watching the company.  That's not great when the rest of the market is expected to grow by 9.9% per annum.

With this information, we are not surprised that Northern Oil and Gas is trading at a P/E lower than the market.  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 Final Word

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 Northern Oil and Gas' 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.  It's hard to see the share price rising strongly in the near future under these circumstances.    

We don't want to rain on the parade too much, but we did also find 6 warning signs for Northern Oil and Gas (2 can't be ignored!) that you need to be mindful 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.