Should You Be Tempted To Sell Aker BP ASA (OB:AKERBP) Because Of Its P/E Ratio?

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Aker BP ASA's (OB:AKERBP) P/E ratio and reflect on what it tells us about the company's share price. Aker BP has a P/E ratio of 25.74, based on the last twelve months. That means that at current prices, buyers pay NOK25.74 for every NOK1 in trailing yearly profits.

See our latest analysis for Aker BP

How Do I Calculate Aker BP's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Aker BP:

P/E of 25.74 = $32.89 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $1.28 (Based on the trailing twelve months to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each NOK1 the company has earned over the last year. 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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, Aker BP grew EPS by a whopping 149% in the last year. And it has bolstered its earnings per share by 48% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

How Does Aker BP's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Aker BP has a higher P/E than the average (11.6) P/E for companies in the oil and gas industry.

Aker BP's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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.

Aker BP's Balance Sheet

Net debt totals 24% of Aker BP's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On Aker BP's P/E Ratio

Aker BP trades on a P/E ratio of 25.7, which is above the NO market average of 12.7. Its debt levels do not imperil its balance sheet and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.' So this freereport on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Aker BP. So you may wish to see this freecollection of other companies that have grown earnings strongly.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.