Does Overseas Shipholding Group Inc’s (NYSE:OSG) P/E Ratio Signal A Buying Opportunity?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Overseas Shipholding Group Inc’s (NYSE:OSG) P/E ratio could help you assess the value on offer. Based on the last twelve months, Overseas Shipholding Group’s P/E ratio is 4.81. In other words, at today’s prices, investors are paying $4.81 for every $1 in prior year profit.

Check out our latest analysis for Overseas Shipholding Group

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Overseas Shipholding Group:

P/E of 4.81 = $2.96 ÷ $0.62 (Based on the trailing twelve months to June 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

It’s nice to see that Overseas Shipholding Group grew EPS by a stonking 166% in the last year. And it has bolstered its earnings per share by 84% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 31% a year, over 3 years.

How Does Overseas Shipholding Group’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Overseas Shipholding Group has a lower P/E than the average (13.3) in the oil and gas industry classification.

NYSE:OSG PE PEG Gauge October 30th 18
NYSE:OSG PE PEG Gauge October 30th 18

This suggests that market participants think Overseas Shipholding Group will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Overseas Shipholding Group’s Balance Sheet

Net debt totals 98% of Overseas Shipholding Group’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.

The Verdict On Overseas Shipholding Group’s P/E Ratio

Overseas Shipholding Group’s P/E is 4.8 which is below average (18.1) in the US market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Overseas Shipholding Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.