Yahoo Finance What Does Pembina Pipeline Corporation's (TSE:PPL) P/E Ratio Tell You?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Pembina Pipeline Corporation's (TSE:PPL) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Pembina Pipeline has a P/E ratio of 15.06. That corresponds to an earnings yield of approximately 6.6%.
Check out our latest analysis for Pembina Pipeline
How Do I Calculate Pembina Pipeline's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Pembina Pipeline:
P/E of 15.06 = CA$46.89 ÷ CA$3.11 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does Pembina Pipeline Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (8.9) for companies in the oil and gas industry is lower than Pembina Pipeline's P/E.
Its relatively high P/E ratio indicates that Pembina Pipeline shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Pembina Pipeline increased earnings per share by a whopping 27% last year. And earnings per share have improved by 22% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Pembina Pipeline's Balance Sheet
Net debt is 32% of Pembina Pipeline's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Pembina Pipeline's P/E Ratio
Pembina Pipeline trades on a P/E ratio of 15.1, which is fairly close to the CA market average of 14.2. When you consider the impressive EPS growth last year (along with some debt), it seems the market has questions about whether rapid EPS growth will be sustained.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Pembina Pipeline may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
