Yahoo Finance Despite Its High P/E Ratio, Is Diamondback Energy, Inc. (NASDAQ:FANG) Still Undervalued?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Diamondback Energy, Inc.'s (NASDAQ:FANG) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Diamondback Energy has a P/E ratio of 14.30. That corresponds to an earnings yield of approximately 7.0%.
View our latest analysis for Diamondback Energy
How Do You Calculate Diamondback Energy's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Diamondback Energy:
P/E of 14.30 = $85.42 ÷ $5.97 (Based on the trailing twelve months 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Diamondback Energy Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Diamondback Energy has a higher P/E than the average company (9.9) in the oil and gas industry.
That means that the market expects Diamondback Energy will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Diamondback Energy saw earnings per share improve by -3.7% last year. And its annual EPS growth rate over 5 years is 27%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
Is Debt Impacting Diamondback Energy's P/E?
Diamondback Energy has net debt equal to 30% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Diamondback Energy's P/E Ratio
Diamondback Energy has a P/E of 14.3. That's below the average in the US market, which is 17.6. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue - or even increase - then the low P/E may signify opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Diamondback Energy. 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.
