There wouldn't be many who think Ocean Bio-Chem, Inc.'s (NASDAQ:OBCI) price-to-earnings (or "P/E") ratio of 19.8x is worth a mention when the median P/E in the United States is similar at about 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Ocean Bio-Chem certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
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.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like Ocean Bio-Chem's is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 102% last year. Pleasingly, EPS has also lifted 65% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 5.1% shows it's noticeably more attractive on an annualised basis.
In light of this, it's curious that Ocean Bio-Chem's P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Ocean Bio-Chem currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
You should always think about risks. Case in point, we've spotted 2 warning signs for Ocean Bio-Chem you should be aware of.
Of course, you might also be able to find a better stock than Ocean Bio-Chem. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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