Yahoo Finance Does Peyto Exploration & Development Corp. (TSE:PEY) Have A Good P/E Ratio?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Peyto Exploration & Development Corp.’s (TSE:PEY) P/E ratio could help you assess the value on offer. Peyto Exploration & Development has a price to earnings ratio of 8.45, based on the last twelve months. That is equivalent to an earnings yield of about 12%.
View our latest analysis for Peyto Exploration & Development
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Peyto Exploration & Development:
P/E of 8.45 = CA$8.16 ÷ CA$0.97 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.
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. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Peyto Exploration & Development shrunk earnings per share by 2.7% last year. But over the longer term (3 years), earnings per share have increased by 7.2%. And it has shrunk its earnings per share by 6.6% per year over the last five years. So you wouldn’t expect a very high P/E.
How Does Peyto Exploration & Development’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Peyto Exploration & Development has a lower P/E than the average (13.5) P/E for companies in the oil and gas industry.
Its relatively low P/E ratio indicates that Peyto Exploration & Development shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
Peyto Exploration & Development’s Balance Sheet
Peyto Exploration & Development’s net debt is 84% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Peyto Exploration & Development’s P/E Ratio
Peyto Exploration & Development has a P/E of 8.5. That’s below the average in the CA market, which is 13.2. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.
Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Peyto Exploration & Development. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.