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Does Solaris Oilfield Infrastructure, Inc.'s (NYSE:SOI) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

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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 Solaris Oilfield Infrastructure, Inc.'s (NYSE:SOI) P/E ratio and reflect on what it tells us about the company's share price. Solaris Oilfield Infrastructure has a price to earnings ratio of 10.45, based on the last twelve months. That corresponds to an earnings yield of approximately 9.6%.

View our latest analysis for Solaris Oilfield Infrastructure

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Solaris Oilfield Infrastructure:

P/E of 10.45 = $16.77 ÷ $1.6 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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

Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Notably, Solaris Oilfield Infrastructure grew EPS by a whopping 474% in the last year.

How Does Solaris Oilfield Infrastructure's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Solaris Oilfield Infrastructure has a lower P/E than the average (21.4) in the energy services industry classification.

NYSE:SOI Price Estimation Relative to Market, April 5th 2019

This suggests that market participants think Solaris Oilfield Infrastructure will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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 Solaris Oilfield Infrastructure's P/E?

The extra options and safety that comes with Solaris Oilfield Infrastructure's US$13m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Solaris Oilfield Infrastructure's P/E Ratio

Solaris Oilfield Infrastructure trades on a P/E ratio of 10.5, which is below the US market average of 17.9. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The relatively low P/E ratio implies the market is pessimistic. Given analysts are expecting further growth, one I would have expected a higher P/E ratio. So this stock may well be worth further research.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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: Solaris Oilfield Infrastructure 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).

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.