Earnings Not Telling The Story For Ocean Bio-Chem, Inc. (NASDAQ:OBCI)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Ocean Bio-Chem, Inc. (NASDAQ:OBCI) as a stock to avoid entirely with its 51.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Earnings have risen firmly for Ocean Bio-Chem recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Ocean Bio-Chem

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ocean Bio-Chem will help you shine a light on its historical performance.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Ocean Bio-Chem would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. EPS has also lifted 5.0% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 2.2% shows it's about the same on an annualised basis.

In light of this, it's curious that Ocean Bio-Chem's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Ocean Bio-Chem currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Ocean Bio-Chem you should be aware of.

If you're unsure about the strength of Ocean Bio-Chem's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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