Yahoo Finance Read This Before You Buy Westlake Chemical Corporation (NYSE:WLK) Because Of Its P/E Ratio
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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Westlake Chemical Corporation's (NYSE:WLK) P/E ratio could help you assess the value on offer. Based on the last twelve months, Westlake Chemical's P/E ratio is 11.53. That means that at current prices, buyers pay $11.53 for every $1 in trailing yearly profits.
View our latest analysis for Westlake Chemical
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Westlake Chemical:
P/E of 11.53 = $69.35 ÷ $6.02 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Does Westlake Chemical's P/E Ratio Compare To Its Peers?
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 (18.8) for companies in the chemicals industry is higher than Westlake Chemical's P/E.
This suggests that market participants think Westlake Chemical will underperform other companies in its industry. 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Westlake Chemical's earnings per share fell by 46% in the last twelve months. But it has grown its earnings per share by 4.5% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
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).
Westlake Chemical's Balance Sheet
Net debt is 25% of Westlake Chemical's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Westlake Chemical's P/E Ratio
Westlake Chemical's P/E is 11.5 which is below average (18) in the US market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Westlake Chemical. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
