Yahoo Finance A Sliding Share Price Has Us Looking At TGS-NOPEC Geophysical Company ASA's (OB:TGS) P/E Ratio
Unfortunately for some shareholders, the TGS-NOPEC Geophysical (OB:TGS) share price has dived 57% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 55% drop over twelve months.
All else being equal, a share price drop should make a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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.
Check out our latest analysis for TGS-NOPEC Geophysical
Does TGS-NOPEC Geophysical Have A Relatively High Or Low P/E For Its Industry?
TGS-NOPEC Geophysical's P/E of 9.83 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (6.0) for companies in the energy services industry is lower than TGS-NOPEC Geophysical's P/E.
Its relatively high P/E ratio indicates that TGS-NOPEC Geophysical shareholders think it will perform better than other companies in its industry classification. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
TGS-NOPEC Geophysical shrunk earnings per share by 47% over the last year. But EPS is up 49% over the last 3 years. And EPS is down 15% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 TGS-NOPEC Geophysical's Debt Impact Its P/E Ratio?
With net cash of US$321m, TGS-NOPEC Geophysical has a very strong balance sheet, which may be important for its business. Having said that, at 30% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On TGS-NOPEC Geophysical's P/E Ratio
TGS-NOPEC Geophysical trades on a P/E ratio of 9.8, which is fairly close to the NO market average of 9.3. While the absence of growth in the last year is probably causing a degree of pessimism, the net cash position means it's not surprising that expectations put the company roughly in line with the market average P/E. What can be absolutely certain is that the market has become more pessimistic about TGS-NOPEC Geophysical over the last month, with the P/E ratio falling from 22.7 back then to 9.8 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
Of course you might be able to find a better stock than TGS-NOPEC Geophysical. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
