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Is Oil Search Limited (ASX:OSH) A Sell At Its Current PE Ratio?

Oil Search Limited (ASX:OSH) trades with a trailing P/E of 42.6x, which is higher than the industry average of 11.6x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Oil Search

Demystifying the P/E ratio

ASX:OSH PE PEG Gauge Dec 8th 17
ASX:OSH PE PEG Gauge Dec 8th 17

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for OSH

Price-Earnings Ratio = Price per share ÷ Earnings per share

OSH Price-Earnings Ratio = $5.41 ÷ $0.127 = 42.6x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to OSH, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since OSH’s P/E of 42.6x is higher than its industry peers (11.6x), it means that investors are paying more than they should for each dollar of OSH’s earnings. Therefore, according to this analysis, OSH is an over-priced stock.

A few caveats

While our conclusion might prompt you to sell your OSH shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to OSH, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with OSH, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing OSH to are fairly valued by the market. If this is violated, OSH’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in OSH. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.

Are you a potential investor? If you are considering investing in OSH, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.

PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Oil Search for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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