This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Ocean Bio-Chem, Inc.'s (NASDAQ:OBCI) P/E ratio to inform your assessment of the investment opportunity. Ocean Bio-Chem has a price to earnings ratio of 10.8, based on the last twelve months. That means that at current prices, buyers pay $10.8 for every $1 in trailing yearly profits.

See our latest analysis for Ocean Bio-Chem

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Ocean Bio-Chem:

P/E of 10.8 = $3.33 ÷ $0.31 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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.

Does Ocean Bio-Chem Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (29.2) for companies in the household products industry is higher than Ocean Bio-Chem's P/E.

Ocean Bio-Chem's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Ocean Bio-Chem's earnings per share were pretty steady over the last year. But EPS is up 11% over the last 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. 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.