Does Keyera Corp’s (TSE:KEY) PE Ratio Signal A Selling Opportunity?
Keyera Corp (TSX:KEY) trades with a trailing P/E of 24.5x, which is higher than the industry average of 19.4x. While this makes KEY appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Keyera
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for KEY
Price-Earnings Ratio = Price per share ÷ Earnings per share
KEY Price-Earnings Ratio = CA$35.58 ÷ CA$1.452 = 24.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to KEY, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since KEY’s P/E of 24.5x is higher than its industry peers (19.4x), it means that investors are paying more than they should for each dollar of KEY’s earnings. Therefore, according to this analysis, KEY is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your KEY shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to KEY. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with KEY, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing KEY to are fairly valued by the market. If this does not hold, there is a possibility that KEY’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to KEY. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for KEY’s future growth? Take a look at our free research report of analyst consensus for KEY’s outlook.
Past Track Record: Has KEY been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of KEY’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass 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.
