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Here’s How P/E Ratios Can Help Us Understand Trecora Resources (NYSE:TREC)

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Trecora Resources’s (NYSE:TREC) P/E ratio to inform your assessment of the investment opportunity. Trecora Resources has a P/E ratio of 10.07, based on the last twelve months. That means that at current prices, buyers pay $10.07 for every $1 in trailing yearly profits.

Check out our latest analysis for Trecora Resources

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Trecora Resources:

P/E of 10.07 = $6.99 ÷ $0.69 (Based on the year to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Notably, Trecora Resources grew EPS by a whopping 428% in the last year. Unfortunately, earnings per share are down 4.1% a year, over 5 years.

How Does Trecora Resources’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Trecora Resources has a lower P/E than the average (17.3) P/E for companies in the chemicals industry.

NYSE:TREC PE PEG Gauge December 24th 18
NYSE:TREC PE PEG Gauge December 24th 18

Its relatively low P/E ratio indicates that Trecora Resources shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Trecora Resources’s P/E?

Net debt totals 61% of Trecora Resources’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.

The Verdict On Trecora Resources’s P/E Ratio

Trecora Resources has a P/E of 10.1. That’s below the average in the US market, which is 15.8. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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