BW Offshore Limited's (OB:BWO) Earnings Are Not Doing Enough For Some Investors

When close to half the companies in Norway have price-to-earnings ratios (or "P/E's") above 12x, you may consider BW Offshore Limited (OB:BWO) as a highly attractive investment with its 3.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

BW Offshore certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like BW Offshore's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 35% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 107% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 54% per annum during the coming three years according to the two analysts following the company. That's not great when the rest of the market is expected to grow by 25% per annum.

In light of this, it's understandable that BW Offshore's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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 BW Offshore maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for BW Offshore you should be aware of, and 1 of them is potentially serious.

If these risks are making you reconsider your opinion on BW Offshore, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.