Yahoo Finance What Does Westlake Chemical Partners LP’s (NYSE:WLKP) PE Ratio Tell You?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Westlake Chemical Partners LP (NYSE:WLKP) is currently trading at a trailing P/E of 12.1x, which is lower than the industry average of 20.3x. While WLKP might seem like an attractive stock to buy, 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.
View our latest analysis for Westlake Chemical Partners
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 WLKP
Price-Earnings Ratio = Price per share ÷ Earnings per share
WLKP Price-Earnings Ratio = $25.55 ÷ $2.112 = 12.1x
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 WLKP, 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. WLKP’s P/E of 12.1 is lower than its industry peers (20.3), which implies that each dollar of WLKP’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 25 Chemicals companies in US including China SNX Organic Fertilizers, ONE Bio and China Green Agriculture. One could put it like this: the market is pricing WLKP as if it is a weaker company than the average company in its industry.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to WLKP. 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 WLKP, 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 WLKP to are fairly valued by the market. If this does not hold, there is a possibility that WLKP’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to WLKP. 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 WLKP’s future growth? Take a look at our free research report of analyst consensus for WLKP’s outlook.
Past Track Record: Has WLKP 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 WLKP’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
