Oceana Group Limited's (JSE:OCE) price-to-earnings (or "P/E") ratio of 11.5x might make it look like a sell right now compared to the market in South Africa, where around half of the companies have P/E ratios below 8x and even P/E's below 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With earnings growth that's inferior to most other companies of late, Oceana Group has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Oceana Group
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Oceana Group.
How Is Oceana Group's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as high as Oceana Group's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a terrific increase of 16%. EPS has also lifted 18% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the three analysts following the company. With the market only predicted to deliver 7.5% each year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Oceana Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Oceana Group's P/E
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 Oceana Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Oceana Group that you should be aware of.
You might be able to find a better investment than Oceana Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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