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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Odfjell Drilling Ltd.'s (OB:ODL) P/E ratio to inform your assessment of the investment opportunity. Odfjell Drilling has a P/E ratio of 30.68, based on the last twelve months. That corresponds to an earnings yield of approximately 3.3%.
View our latest analysis for Odfjell Drilling
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Odfjell Drilling:
P/E of 30.68 = $3.16 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.10 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each NOK1 of company earnings. 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
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Odfjell Drilling shrunk earnings per share by 42% over the last year. And over the longer term (5 years) earnings per share have decreased 21% annually. This might lead to muted expectations.
Does Odfjell Drilling Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Odfjell Drilling has a higher P/E than the average (17.7) P/E for companies in the energy services industry.
That means that the market expects Odfjell Drilling will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.