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How Does Overseas Shipholding Group's (NYSE:OSG) P/E Compare To Its Industry, After Its Big Share Price Gain?

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Overseas Shipholding Group (NYSE:OSG) shares have had a really impressive month, gaining 36%, after some slippage. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Overseas Shipholding Group

Does Overseas Shipholding Group Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 24.08 that there is some investor optimism about Overseas Shipholding Group. You can see in the image below that the average P/E (6.7) for companies in the oil and gas industry is a lot lower than Overseas Shipholding Group's P/E.

NYSE:OSG Price Estimation Relative to Market March 31st 2020
NYSE:OSG Price Estimation Relative to Market March 31st 2020

Overseas Shipholding Group's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Overseas Shipholding Group's earnings per share fell by 36% in the last twelve months.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

So What Does Overseas Shipholding Group's Balance Sheet Tell Us?

Overseas Shipholding Group has net debt worth a very significant 162% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On Overseas Shipholding Group's P/E Ratio

Overseas Shipholding Group has a P/E of 24.1. That's higher than the average in its market, which is 13.1. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. What is very clear is that the market has become significantly more optimistic about Overseas Shipholding Group over the last month, with the P/E ratio rising from 17.7 back then to 24.1 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 have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Overseas Shipholding Group 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).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.