Should You Be Tempted To Sell Panhandle Oil and Gas Inc (NYSE:PHX) At Its Current PE Ratio?
Panhandle Oil and Gas Inc (NYSE:PHX) is currently trading at a trailing P/E of 15.8x, which is higher than the industry average of 13.8x. While PHX 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 Panhandle Oil and Gas
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 PHX
Price-Earnings Ratio = Price per share ÷ Earnings per share
PHX Price-Earnings Ratio = $18.3 ÷ $1.156 = 15.8x
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 PHX, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since PHX’s P/E of 15.8x is higher than its industry peers (13.8x), it means that investors are paying more than they should for each dollar of PHX’s earnings. Therefore, according to this analysis, PHX is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that PHX should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to PHX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with PHX, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing PHX to are fairly valued by the market. If this does not hold, there is a possibility that PHX’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.
