Yahoo Finance A Rising Share Price Has Us Looking Closely At Magnolia Oil & Gas Corporation's (NYSE:MGY) P/E Ratio
Those holding Magnolia Oil & Gas (NYSE:MGY) shares must be pleased that the share price has rebounded 79% in the last thirty days. But unfortunately, the stock is still down by 38% over a quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 50% share price decline throughout the year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. Perhaps the simplest way to get a read on investors' expectations of a business 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 Magnolia Oil & Gas
Does Magnolia Oil & Gas Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 22.08 that there is some investor optimism about Magnolia Oil & Gas. You can see in the image below that the average P/E (9.9) for companies in the oil and gas industry is lower than Magnolia Oil & Gas's P/E.
Its relatively high P/E ratio indicates that Magnolia Oil & Gas shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Magnolia Oil & Gas saw earnings per share decrease by 52% last year. But EPS is up 62% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.
So What Does Magnolia Oil & Gas's Balance Sheet Tell Us?
Net debt totals 13% of Magnolia Oil & Gas's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Verdict On Magnolia Oil & Gas's P/E Ratio
Magnolia Oil & Gas's P/E is 22.1 which is above average (14.9) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What we know for sure is that investors have become much more excited about Magnolia Oil & Gas recently, since they have pushed its P/E ratio from 12.3 to 22.1 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Magnolia Oil & Gas may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
