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Despite Its High P/E Ratio, Is Panhandle Oil and Gas Inc. (NYSE:PHX) Still Undervalued?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Panhandle Oil and Gas Inc.'s (NYSE:PHX) P/E ratio and reflect on what it tells us about the company's share price. What is Panhandle Oil and Gas's P/E ratio? Well, based on the last twelve months it is 18.02. That is equivalent to an earnings yield of about 5.5%.

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price Ã· Earnings per Share (EPS)

Or for Panhandle Oil and Gas:

P/E of 18.02 = \$14.44 Ã· \$0.80 (Based on the year to December 2018.)

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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

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 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.

Panhandle Oil and Gas shrunk earnings per share by 31% over the last year. And over the longer term (5 years) earnings per share have decreased 4.4% annually. This could justify a pessimistic P/E.

Does Panhandle Oil and Gas 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. The image below shows that Panhandle Oil and Gas has a higher P/E than the average (12.5) P/E for companies in the oil and gas industry.

Its relatively high P/E ratio indicates that Panhandle Oil and Gas shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors 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

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 Panhandle Oil and Gas's P/E?

Panhandle Oil and Gas has net debt worth 17% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On Panhandle Oil and Gas's P/E Ratio

Panhandle Oil and Gas has a P/E of 18. That's around the same as the average in the US market, which is 18.1. Given it has some debt, but didn't grow last year, the P/E indicates the market is expecting higher profits ahead for the business.

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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Panhandle Oil and Gas. 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.