This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in PolyOne Corporation (NYSE:POL).
PolyOne Corporation (NYSE:POL) is trading with a trailing P/E of 20.2x, which is higher than the industry average of 16.7x. While POL 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 PolyOne
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 POL
Price-Earnings Ratio = Price per share ÷ Earnings per share
POL Price-Earnings Ratio = $43.18 ÷ $2.133 = 20.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to POL, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since POL’s P/E of 20.2x is higher than its industry peers (16.7x), it means that investors are paying more than they should for each dollar of POL’s earnings. As such, our analysis shows that POL represents an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that POL 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 POL, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with POL, 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 POL to are fairly valued by the market. If this is violated, POL’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to POL. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for POL’s future growth? Take a look at our free research report of analyst consensus for POL’s outlook.
- Past Track Record: Has POL 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 POL’s historicals for more clarity.
- 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.