Ezion’s Shares Have Dropped By 52% In A Year: What’s Going On?

Ezion (SGX: 5ME), which provides support services to the oil & gas industry, has seen its share price get slashed by more than half over the last 12 months. Let’s try to get some insight behind this.

A simple framework

There can be good reasons as well as poor reasons for why a stock’s price moves.

For the Foolish investor, understanding the right reason is important. If we can determine the reason, we may get an inkling on whether the movement in the stock price is deserved or undeserved and thus act accordingly.

To help with this, I would like to defer to a couple of paragraphs from The Little Book that Builds Wealth by author and fund manager Pat Dorsey:

“Over long stretches of time, there are just two things that push a stock up or down: The investment return, driven by earnings growth and dividends, and the speculative return, driven by changes in the price-earnings (P/E) ratio.

Think of the investment return as reflecting a company’s financial performance, and the speculative return as reflecting the exuberance or pessimism of other investors.”

Under Dorsey’s framework, stock price returns can be from the deserved-end of the spectrum (investment return), the undeserved-end of the spectrum (speculative return), or anywhere in between.

Deciphering the fall  

To gains some understanding of Ezion’s experience, we can note simple but important financial metrics like its earnings per share (EPS) and price to earnings (PE ratio); these numbers could also be a simple way for you to track the progress of any company over time and can form part of your investment journal entries.

Below, I have summarized how Ezion’s EPS, PE ratio, and stock price have changed compared to a year ago:

2015-10 Ezion Table

Source: Google Finance; Earnings Report

As you can tell, Ezion’s 52% stock price decline can entirely be attributed to a lower PE ratio.

The last reporting quarter was a tough one for Ezion. The oil & gas support services provider saw its profit for the quarter plunge 36.3% year-on-year and reported a negative free cash flow of US$39 million. Meanwhile, Ezion had a net debt position of US$1.28 billion on its balance sheet as of 30 June 2015.

Given that the price of oil is now less than US$50 per barrel after falling from a peak of more than US$100 in 2014, the current outlook for Ezion appears to be uncertain. That may be why the company is sporting a low PE ratio at the moment. For context, the PE ratio of the SPDR STI ETF (SGX: ES3), an exchange-traded fund which mimics the fundamentals of the Straits Times Index (SGX: ^STI), is around 12 now.

Foolish takeaway

If a stock price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (decline), or whether it is simply a result of investor exuberance (pessimism).

When we understand the difference, we may become a better judge on whether a stock’s price gains (losses) are justified – with commensurate growth (decline) in earnings – or had happened because of the market’s irrationality. Such knowledge can then aid us in our decision making.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.