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How Does Gibson Energy's (TSE:GEI) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Gibson Energy (TSE:GEI) shareholders are no doubt pleased to see that the share price has bounced 43% in the last month alone, although it is still down 34% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 22% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

See our latest analysis for Gibson Energy

Does Gibson Energy Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 15.01 that there is some investor optimism about Gibson Energy. The image below shows that Gibson Energy has a higher P/E than the average (6.8) P/E for companies in the oil and gas industry.

TSX:GEI Price Estimation Relative to Market April 17th 2020

Its relatively high P/E ratio indicates that Gibson Energy shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. 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. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Gibson Energy's earnings made like a rocket, taking off 115% last year.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Gibson Energy's Debt Impact Its P/E Ratio?

Gibson Energy has net debt equal to 45% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Gibson Energy's P/E Ratio

Gibson Energy trades on a P/E ratio of 15.0, which is above its market average of 11.5. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable. What we know for sure is that investors have become more excited about Gibson Energy recently, since they have pushed its P/E ratio from 10.5 to 15.0 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

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. 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 Gibson Energy. 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.