This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Overseas Shipholding Group Inc (NYSE:OSG).
Overseas Shipholding Group Inc (NYSE:OSG) is currently trading at a trailing P/E of 6.2x, which is lower than the industry average of 13.3x. While this makes OSG appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Overseas Shipholding Group
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for OSG
Price per share = $3.82
Earnings per share = $0.617
∴ Price-Earnings Ratio = $3.82 ÷ $0.617 = 6.2x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to OSG, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
OSG’s P/E of 6.2x is lower than its industry peers (13.3x), which implies that each dollar of OSG’s earnings is being undervalued by investors. As such, our analysis shows that OSG represents an under-priced stock.
A few caveats
Before you jump to the conclusion that OSG represents the perfect buying opportunity, it is important to realise that our conclusion rests on two important assertions. The first is that our “similar companies” are actually similar to OSG. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you are inadvertently comparing lower risk firms with OSG, then OSG’s P/E would naturally be lower than its peers, since investors would value those with lower risk with a higher price. The other possibility is if you were accidentally comparing higher growth firms with OSG. In this case, OSG’s P/E would be lower since investors would also reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing OSG to are fairly valued by the market. If this assumption does not hold true, OSG’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to OSG. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for OSG’s future growth? Take a look at our free research report of analyst consensus for OSG’s outlook.
- Past Track Record: Has OSG been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of OSG’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.