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A Sliding Share Price Has Us Looking At Golden Ocean Group Limited's (NASDAQ:GOGL) P/E Ratio

Simply Wall St

To the annoyance of some shareholders, Golden Ocean Group (NASDAQ:GOGL) shares are down a considerable 31% in the last month. That drop has capped off a tough year for shareholders, with the share price down 43% in that time.

Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

View our latest analysis for Golden Ocean Group

How Does Golden Ocean Group's P/E Ratio Compare To Its Peers?

Golden Ocean Group's P/E of 10.46 indicates some degree of optimism towards the stock. As you can see below, Golden Ocean Group has a higher P/E than the average company (7.3) in the shipping industry.

NasdaqGS:GOGL Price Estimation Relative to Market March 28th 2020

Its relatively high P/E ratio indicates that Golden Ocean Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Golden Ocean Group's earnings per share fell by 56% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 30% annually. This could justify a pessimistic P/E.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Golden Ocean Group's Debt Impact Its P/E Ratio?

Golden Ocean Group has net debt worth a very significant 262% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On Golden Ocean Group's P/E Ratio

Golden Ocean Group has a P/E of 10.5. That's below the average in the US market, which is 13.0. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future. Given Golden Ocean Group's P/E ratio has declined from 15.2 to 10.5 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.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Golden Ocean 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.