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# Should You Be Tempted To Buy Smart Sand Inc (NASDAQ:SND) Because Of Its PE Ratio?

Smart Sand Inc (NASDAQ:SND) is trading with a trailing P/E of 10.5x, which is lower than the industry average of 17.7x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

### What you need to know about the P/E ratio

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for SND

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

SND Price-Earnings Ratio = \$5.6 ÷ \$0.533 = 10.5x

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 SND, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 10.5x, SND’s P/E is lower than its industry peers (17.7x). This implies that investors are undervaluing each dollar of SND’s earnings. Therefore, according to this analysis, SND is an under-priced stock.

### A few caveats

While our conclusion might prompt you to buy SND immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to SND. 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 SND, 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 SND to are fairly valued by the market. If this does not hold true, SND’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

### 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 SND 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:

1. Future Outlook: What are well-informed industry analysts predicting for SND’s future growth? Take a look at our free research report of analyst consensus for SND’s outlook.
2. Financial Health: Is SND’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
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.