XOM is currently trading at a high trailing PE of 17.14x, which is 1.27 times more expensive than the 13.51x average multiple of the Oil and Gas. However, a static multiple such as PE is never conclusive on its own. This is because there are many company-specific factors like future prospects and capital structure, which are unaccounted for. Below, I will lay out some important considerations to help determine which multiple best suits XOM. Let’s take a look below.
How much does XOM earn?
The PE multiple is useful for when a company is profitable, which is the case with XOM. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. For these companies, it is possible to compare price to other fundamentals like sales or book value where applicable. XOM’s previous earnings record has continuously produced positive numbers. This means an earnings-based multiple such as the PE ratio can be a useful valuation instrument, however, there may be a better option.
Does XOM owe a lot of money?
The business is appropriately levered which means there’s no real concern over the level of money owed. The D/E ratio shows us that the current level of debt only makes up 20.84% of the company’s equity. This is a suitable range, however, risk associated with debt obligation still exists, as with any company with debt on the books. This isn’t an alarming amount, but investors should still proceed with caution. You may be wondering how debt impacts an equity valuation. Well, the company’s share price theoretically represents the value of its equity portion only. However, it’s crucial to account for debt as well, since debt also contributes to the company’s earnings capacity and risk. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple.
XOM’s EV/EBITDA = US$384.62b / US$0 = 10.99x
Will XOM experience high growth?
Earnings are forecasted to grow at 3.03% annually for the next 5 years, indicating a steady outlook. This means that using trailing EBITDA is still sensible for our multiple as the bottom line isn’t expected to change drastically moving forward. If this wasn’t the case, I would suggest using a future estimate of XOM’s EBITDA to calculate a “forward” EV/EBITDA, which results in a similar multiple to its “trailing” of 10.99x.
Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. 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 ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
- Past Track Record: Has 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 ‘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.