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# Should You Sell Emerge Energy Services LP (NYSE:EMES) At This PE Ratio?

I am writing today to help inform people who are new to the stock market and want to begin learning the link between Emerge Energy Services LP (NYSE:EMES)’s fundamentals and stock market performance.

Emerge Energy Services LP (NYSE:EMES) is currently trading at a trailing P/E of 24.2x, which is higher than the industry average of 13.4x. While EMES 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. 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.

### 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 EMES

Price-Earnings Ratio = Price per share ÷ Earnings per share

EMES Price-Earnings Ratio = \$7.28 ÷ \$0.301 = 24.2x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to EMES, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 24.2x, EMES’s P/E is higher than its industry peers (13.4x). This implies that investors are overvaluing each dollar of EMES’s earnings. As such, our analysis shows that EMES represents an over-priced stock.

### Assumptions to watch out for

Before you jump to the conclusion that EMES should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to EMES, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with EMES, 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 EMES to are fairly valued by the market. If this does not hold, there is a possibility that EMES’s P/E is lower because our peer group is overvalued by the market.

### What this means for you:

Since you may have already conducted your due diligence on EMES, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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:

1. Future Outlook: What are well-informed industry analysts predicting for EMES’s future growth? Take a look at our free research report of analyst consensus for EMES’s outlook.
2. Past Track Record: Has EMES 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 EMES’s historicals for more clarity.
3. 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.