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Despite Its High P/E Ratio, Is Keane Group, Inc. (NYSE:FRAC) Still Undervalued?

Simply Wall St

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Keane Group, Inc.'s (NYSE:FRAC) P/E ratio to inform your assessment of the investment opportunity. Keane Group has a price to earnings ratio of 21.01, based on the last twelve months. In other words, at today's prices, investors are paying $21.01 for every $1 in prior year profit.

View our latest analysis for Keane Group

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Keane Group:

P/E of 21.01 = $8.95 ÷ $0.43 (Based on the year to March 2019.)

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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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. Then, a lower P/E should attract more buyers, pushing the share price up.

Keane Group's earnings made like a rocket, taking off 66% last year.

How Does Keane Group'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. You can see in the image below that the average P/E (21) for companies in the energy services industry is roughly the same as Keane Group's P/E.

NYSE:FRAC Price Estimation Relative to Market, May 14th 2019

Keane Group's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Keane Group actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

Keane Group's Balance Sheet

Keane Group's net debt equates to 32% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Keane Group's P/E Ratio

Keane Group has a P/E of 21. That's higher than the average in the US market, which is 17.8. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Keane Group. 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.