It's A Story Of Risk Vs Reward With SBM Offshore N.V. (AMS:SBMO)

When close to half the companies in the Netherlands have price-to-earnings ratios (or "P/E's") above 18x, you may consider SBM Offshore N.V. (AMS:SBMO) as an attractive investment with its 12.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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While the market has experienced earnings growth lately, SBM Offshore's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for SBM Offshore

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

How Is SBM Offshore's Growth Trending?

SBM Offshore's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. This means it has also seen a slide in earnings over the longer-term as EPS is down 31% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 19% per year over the next three years. With the market only predicted to deliver 16% per year, the company is positioned for a stronger earnings result.

With this information, we find it odd that SBM Offshore is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

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.

We've established that SBM Offshore currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for SBM Offshore (1 is a bit unpleasant) you should be aware of.

If you're unsure about the strength of SBM Offshore's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.