Navios Maritime Midstream Partners LP. (NYSE:NAP) is trading with a trailing P/E of 13.4x, which is higher than the industry average of 12.7x. While NAP might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Navios Maritime Midstream Partners
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 NAP
Price-Earnings Ratio = Price per share ÷ Earnings per share
NAP Price-Earnings Ratio = $9.21 ÷ $0.686 = 13.4x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to NAP, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 13.4x, NAP’s P/E is higher than its industry peers (12.7x). This implies that investors are overvaluing each dollar of NAP’s earnings. Therefore, according to this analysis, NAP is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your NAP shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NAP. 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 NAP, 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 NAP to are fairly valued by the market. If this does not hold, there is a possibility that NAP’s P/E is lower because our peer group is overvalued by the market.
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.