Improved Earnings Required Before Siem Offshore Inc. (OB:SIOFF) Stock's 33% Jump Looks Justified

Those holding Siem Offshore Inc. (OB:SIOFF) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. This latest share price bounce rounds out a remarkable 387% gain over the last twelve months.

In spite of the firm bounce in price, Siem Offshore's price-to-earnings (or "P/E") ratio of 6.5x might still make it look like a buy right now compared to the market in Norway, where around half of the companies have P/E ratios above 12x and even P/E's above 22x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For example, consider that Siem Offshore's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

Our analysis indicates that SIOFF is potentially undervalued!

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Siem Offshore will help you shine a light on its historical performance.

How Is Siem Offshore's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 71%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Siem Offshore's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift Siem Offshore's P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Siem Offshore maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 4 warning signs for Siem Offshore (1 is concerning!) that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.