Yahoo Finance Read This Before You Buy Tourmaline Oil Corp. (TSE:TOU) Because Of Its P/E Ratio
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Tourmaline Oil Corp.'s (TSE:TOU) P/E ratio could help you assess the value on offer. Tourmaline Oil has a P/E ratio of 14.47, based on the last twelve months. In other words, at today's prices, investors are paying CA$14.47 for every CA$1 in prior year profit.
Check out our latest analysis for Tourmaline Oil
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Tourmaline Oil:
P/E of 14.47 = CA$21.38 ÷ CA$1.48 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
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. 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.
Tourmaline Oil increased earnings per share by an impressive 15% over the last twelve months. And earnings per share have improved by 13% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Tourmaline Oil's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Tourmaline Oil has a P/E ratio that is roughly in line with the oil and gas industry average (15.3).
That indicates that the market expects Tourmaline Oil will perform roughly in line with other companies in its industry. So if Tourmaline Oil actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Is Debt Impacting Tourmaline Oil's P/E?
Net debt totals 25% of Tourmaline Oil's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Tourmaline Oil's P/E Ratio
Tourmaline Oil's P/E is 14.5 which is about average (15.1) in the CA market. When you consider the impressive EPS growth last year (along with some debt), it seems the market has questions about whether rapid EPS growth will be sustained.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
You might be able to find a better buy than Tourmaline Oil. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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. Thank you for reading.
