Here's How P/E Ratios Can Help Us Understand LyondellBasell Industries N.V. (NYSE:LYB)

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to LyondellBasell Industries N.V.'s (NYSE:LYB), to help you decide if the stock is worth further research. LyondellBasell Industries has a price to earnings ratio of 7.44, based on the last twelve months. That means that at current prices, buyers pay $7.44 for every $1 in trailing yearly profits.

See our latest analysis for LyondellBasell Industries

How Do You Calculate LyondellBasell Industries's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for LyondellBasell Industries:

P/E of 7.44 = USD71.46 ÷ USD9.61 (Based on the year to December 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does LyondellBasell Industries 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. We can see in the image below that the average P/E (19.8) for companies in the chemicals industry is higher than LyondellBasell Industries's P/E.

LyondellBasell Industries's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with LyondellBasell Industries, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

LyondellBasell Industries's earnings per share fell by 20% in the last twelve months. But it has grown its earnings per share by 3.6% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting LyondellBasell Industries's P/E?

Net debt is 46% of LyondellBasell Industries's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On LyondellBasell Industries's P/E Ratio

LyondellBasell Industries's P/E is 7.4 which is below average (16.5) in the US market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: LyondellBasell Industries 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).

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.

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. Thank you for reading.