Is Eastman Chemical Company’s (NYSE:EMN) PE Ratio A Signal To Buy For Investors?
Eastman Chemical Company (NYSE:EMN) trades with a trailing P/E of 11x, which is lower than the industry average of 17.6x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Eastman Chemical
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for EMN
Price-Earnings Ratio = Price per share ÷ Earnings per share
EMN Price-Earnings Ratio = $105.44 ÷ $9.558 = 11x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as EMN, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since EMN’s P/E of 11x is lower than its industry peers (17.6x), it means that investors are paying less than they should for each dollar of EMN’s earnings. As such, our analysis shows that EMN represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that EMN is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to EMN. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with EMN, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing EMN to are fairly valued by the market. If this is violated, EMN’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of EMN to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for EMN’s future growth? Take a look at our free research report of analyst consensus for EMN’s outlook.
Past Track Record: Has EMN 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 EMN’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.
