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Should We Worry About Overseas Shipholding Group, Inc.'s (NYSE:OSG) P/E Ratio?

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  • OSG

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Overseas Shipholding Group, Inc.'s (NYSE:OSG) P/E ratio to inform your assessment of the investment opportunity. Overseas Shipholding Group has a price to earnings ratio of 24.90, based on the last twelve months. That is equivalent to an earnings yield of about 4.0%.

View our latest analysis for Overseas Shipholding Group

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Overseas Shipholding Group:

P/E of 24.90 = $2.420 ÷ $0.097 (Based on the trailing twelve months to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

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

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Overseas Shipholding Group has a significantly higher P/E than the average (7.6) P/E for companies in the oil and gas industry.

NYSE:OSG Price Estimation Relative to Market, March 16th 2020
NYSE:OSG Price Estimation Relative to Market, March 16th 2020

Overseas Shipholding Group'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 further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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 saw earnings per share decrease by 36% last year.

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. 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.

How Does Overseas Shipholding Group's Debt Impact Its P/E Ratio?

Overseas Shipholding Group has net debt worth a very significant 156% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

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

Overseas Shipholding Group trades on a P/E ratio of 24.9, which is above its market average of 14.0. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.