This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Golden Energy Offshore Services AS’s (OB:GEOS-ME) P/E ratio could help you assess the value on offer. Golden Energy Offshore Services has a P/E ratio of 1.82, based on the last twelve months. That is equivalent to an earnings yield of about 55%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Golden Energy Offshore Services:
P/E of 1.82 = NOK6.1 ÷ NOK3.35 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each NOK1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Golden Energy Offshore Services Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (7.2) for companies in the oil and gas industry is higher than Golden Energy Offshore Services’s P/E.
This suggests that market participants think Golden Energy Offshore Services will underperform other companies in its industry.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Golden Energy Offshore Services grew EPS like Taylor Swift grew her fan base back in 2010; the 270% gain was both fast and well deserved.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Golden Energy Offshore Services’s Balance Sheet
The extra options and safety that comes with Golden Energy Offshore Services’s kr15m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Golden Energy Offshore Services’s P/E Ratio
Golden Energy Offshore Services has a P/E of 1.8. That’s below the average in the NO market, which is 13.2. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: Golden Energy Offshore Services may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.