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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Exxon Mobil Corporation's (NYSE:XOM) P/E ratio could help you assess the value on offer. What is Exxon Mobil's P/E ratio? Well, based on the last twelve months it is 17.61. That means that at current prices, buyers pay $17.61 for every $1 in trailing yearly profits.
Check out our latest analysis for Exxon Mobil
How Do You Calculate Exxon Mobil's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Exxon Mobil:
P/E of 17.61 = $76.44 ÷ $4.34 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Exxon Mobil's earnings per share fell by 8.9% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 12%. And over the longer term (5 years) earnings per share have decreased 10.0% annually. So we might expect a relatively low P/E.
How Does Exxon Mobil's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Exxon Mobil has a higher P/E than the average company (13.5) in the oil and gas industry.
Its relatively high P/E ratio indicates that Exxon Mobil shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Exxon Mobil's Balance Sheet Tell Us?
Net debt totals 11% of Exxon Mobil'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 Bottom Line On Exxon Mobil's P/E Ratio
Exxon Mobil trades on a P/E ratio of 17.6, which is fairly close to the US market average of 18.2. With modest debt, and a lack of recent growth, it would seem the market is expecting improvement in earnings.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.
But note: Exxon Mobil 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).
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.
https://finance.yahoo.com/news/why-exxon-mobil-corporations-nyse-160424101.html
2019-07-04 16:04:00Z
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