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What Is Exxon Mobil's (NYSE:XOM) P/E Ratio After Its Share Price Tanked?

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·4 min read
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Unfortunately for some shareholders, the Exxon Mobil (NYSE:XOM) share price has dived 43% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 57% drop over twelve months.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business 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.

See our latest analysis for Exxon Mobil

How Does Exxon Mobil's P/E Ratio Compare To Its Peers?

Exxon Mobil's P/E of 10.25 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (6.5) for companies in the oil and gas industry is lower than Exxon Mobil's P/E.

NYSE:XOM Price Estimation Relative to Market, March 20th 2020
NYSE:XOM Price Estimation Relative to Market, March 20th 2020

Exxon Mobil's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Exxon Mobil saw earnings per share decrease by 31% last year. But EPS is up 21% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 15% annually. This might lead to muted expectations.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Exxon Mobil's Debt Impact Its P/E Ratio?

Net debt is 29% of Exxon Mobil's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Exxon Mobil's P/E Ratio

Exxon Mobil trades on a P/E ratio of 10.3, which is below the US market average of 12.2. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Exxon Mobil's P/E ratio has declined from 18.0 to 10.3 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. 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. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Exxon Mobil 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.