Ocean Bio-Chem (NASDAQ:OBCI) shares have given back plenty of recent gains in the last month, dropping . Indeed, the recent drop has reduced the annual gain to a relatively sedate 2.5% over the last twelve months.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
How Does Ocean Bio-Chem's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 11.57 that sentiment around Ocean Bio-Chem isn't particularly high. The image below shows that Ocean Bio-Chem has a lower P/E than the average (26.2) P/E for companies in the household products industry.
This suggests that market participants think Ocean Bio-Chem will underperform other companies in its industry. Since the market seems unimpressed with Ocean Bio-Chem, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Ocean Bio-Chem saw earnings per share decrease by 16% last year. But it has grown its earnings per share by 6.6% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Ocean Bio-Chem's Balance Sheet
Ocean Bio-Chem has net debt worth just 7.8% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Ocean Bio-Chem's P/E Ratio
Ocean Bio-Chem's P/E is 11.6 which is below average (18.9) in the US market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Ocean Bio-Chem's P/E ratio has declined from 11.6 to 11.6 in the last month, we know for sure that the market is less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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: Ocean Bio-Chem 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).
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