There Is A Reason Odfjell Drilling Ltd.'s (OB:ODL) Price Is Undemanding

With a price-to-earnings (or "P/E") ratio of 4.5x Odfjell Drilling Ltd. (OB:ODL) may be sending very bullish signals at the moment, given that almost half of all companies in Norway have P/E ratios greater than 11x and even P/E's higher than 20x are not unusual. 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.

Odfjell Drilling certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

See our latest analysis for Odfjell Drilling

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

How Is Odfjell Drilling's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Odfjell Drilling's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 378% last year. The latest three year period has also seen an excellent 80% overall rise in EPS, aided by its short-term performance. 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 4.5% per year during the coming three years according to the four analysts following the company. With the market predicted to deliver 24% growth per year, that's a disappointing outcome.

In light of this, it's understandable that Odfjell Drilling'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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Odfjell Drilling maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Odfjell Drilling you should know about.

You might be able to find a better investment than Odfjell Drilling. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.