Yahoo Finance Don't Sell ONEOK, Inc. (NYSE:OKE) Before You Read This
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at ONEOK, Inc.'s (NYSE:OKE) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, ONEOK has a P/E ratio of 24.75. In other words, at today's prices, investors are paying $24.75 for every $1 in prior year profit.
View our latest analysis for ONEOK
How Do You Calculate ONEOK's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for ONEOK:
P/E of 24.75 = USD74.91 ÷ USD3.03 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each USD1 of company earnings. 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.
How Does ONEOK's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, ONEOK has a higher P/E than the average company (8.4) in the oil and gas industry.
Its relatively high P/E ratio indicates that ONEOK 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 further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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.
Notably, ONEOK grew EPS by a whopping 33% in the last year. And it has bolstered its earnings per share by 16% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does ONEOK's Debt Impact Its P/E Ratio?
ONEOK's net debt equates to 39% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On ONEOK's P/E Ratio
ONEOK has a P/E of 24.7. That's higher than the average in its market, which is 18.2. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So on this analysis a high P/E ratio seems reasonable.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: ONEOK 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).
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.
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. Thank you for reading.
