The Centric (LSE: CNA) share price has fallen 21% in 12 months. It’s still up 67% over the last five years, but fundamental valuation metrics could make it look inexpensive.

Perhaps the most widely used metric is the price-to-earnings ratio (P/E). And I’ll try to deal with it.

Uncertainty of profits

We need to decide whether we will look at the trailing P/E ratio. This has the advantage of being calculated based on actual earnings, but that is now a thing of the past.

The forward P/E ratio is based on forecasts and helps us indicate where the valuation may be heading. But forecasts are often wrong.

So I’m going to take the earnings per share (EPS) for the first half of the year, double it as an estimate for the full year, and see where that goes.

Added to this is the fact that Centrica recorded statutory EPS of 25.1p for the first half of the year, compared to 73p in 2023. At the same time, however, adjusted EPS was only 12.8p, compared to an adjusted 25.8p in 2023.

There is a wide discrepancy between current accounting standards and where the company believes the measure of fair profits should lie. This is a cautionary tale for us to always be wary of a single set of results, or even several sets in a relatively miniature period of time.

Difficult valuation

In any case, using first-half adjusted EPS as a basis, the estimated forward P/E for the full year is 4.8.

In fact, it is likely to be higher and second-half earnings will likely decline. Centrica stated that it expected “profitability will be important in the first half of 2024“. The company also expects that net cash “decline in the second half“.

Forecasts assume a full-year P/E of 6.5. This is still very low considering what seems to be a terrible year. Analysts expect more bad news to come, with earnings falling over the next few years and pushing the 2026 P/E ratio to 9.6.

But that’s based on today’s share price, so where do analysts think this will all go?

Objective

City currently has an average price target for Centrica shares of 168p, with a fairly robust buy consensus. If this happens, it could mean an enhance of 38%. To reach the upper end of the target range, at 210p, we would need an enhance of 72%.

There is also a lower end of the range, at 130p. But even that is 6.6% above the price at the time of writing.

This is all very uncertain. And broker price targets can often be nothing more than heated air. But if I owned Centrica stock, I’d at least be glad no one was calling for its collapse.

Oh, you know who thinks Centrica stock is good value? Centrica itself is currently engaged in share buybacks.

Time to buy?

To summarize, the forecasts themselves are not close enough for me to make a purchase decision. There are other valuation metrics that may be much more significant than the P/E ratio right now.

So I would utilize these few pieces as part of my research. I would have to dig much deeper and seriously consider the risk of earnings decline before I decided to buy.