Those holding Australis Oil & Gas (ASX:ATS) shares must be pleased that the share price has rebounded 46% in the last thirty days. But unfortunately, the stock is still down by 34% over a quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 70% share price decline throughout the year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Does Australis Oil & Gas Have A Relatively High Or Low P/E For Its Industry?
Australis Oil & Gas's P/E is 12.29. You can see in the image below that the average P/E (11.7) for companies in the oil and gas industry is roughly the same as Australis Oil & Gas's P/E.
That indicates that the market expects Australis Oil & Gas will perform roughly in line with other companies in its industry. So if Australis Oil & Gas actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. 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.
Australis Oil & Gas's earnings made like a rocket, taking off 469% last year.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Australis Oil & Gas's Balance Sheet
With net cash of US$12m, Australis Oil & Gas has a very strong balance sheet, which may be important for its business. Having said that, at 19% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Australis Oil & Gas's P/E Ratio
Australis Oil & Gas's P/E is 12.3 which is below average (18.9) in the AU market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. Given analysts are expecting further growth, one I would have expected a higher P/E ratio. So this stock may well be worth further research. What is very clear is that the market has become more optimistic about Australis Oil & Gas over the last month, with the P/E ratio rising from 8.4 back then to 12.3 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Australis Oil & Gas. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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