Should You Sell Painted Pony Energy Ltd (TSE:PONY) At This PE Ratio?

PONY is priced at a depressed multiple of 5.93x based on its prior year’s earnings, significantly lagging the Oil and Gas’s average of 19.61x. However, a static multiple such as PE is never conclusive on its own. This is because there are many company-specific factors like future prospects and capital structure, which are unaccounted for. In this article, I am going to take you through some key things to consider in order to identify which multiple is the most relevant for PONY. Let’s take a look below.

How much does PONY earn?

The PE multiple is useful for when a company is profitable, which is the case with PONY. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. For these companies, it is possible to compare price to other fundamentals like sales or book value where applicable. PONY’s previous earnings record has seen negative numbers, until 2017 saw a breakeven period with earnings of CA$122.38m, followed by the most recent bottom-line of CA$57.09m. With upcoming earnings expected to remain positive, PE can be a valid multiple to apply to the company, however, there may be a better option.

TSX:PONY Future Profit June 22nd 18
TSX:PONY Future Profit June 22nd 18

Does PONY owe a lot of money?

Generally, debt should be below 40% of equity. Given that ’s debt-to-equity ratio is currently 78.40%, there’s room for improvement. This ratio indicates that for every CA$1 you invest, the company owes CA$0.78 to debtors. This can be risky, given that in the event of bankruptcy, these debtors receive the first claim on the assets of the company.

TSX:PONY Historical Debt June 22nd 18
TSX:PONY Historical Debt June 22nd 18
Debt levels matter when valuing the business because in theory PONY’s share price represents the equity portion only, but its important to account for debt, as debt represents a liability to the owner, and it impacts the earnings capacity and risk profile of the company. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple.

PONY’s EV/EBITDA = CA$1.19b / CA$0 = 4.78x

PONY’s multiple appears undervalued when likened to the industry’s average of 4.78x, but at a more sobering tone than suggested by the PE ratio.

Does PONY have a fast-growing outlook?

According to industry analyst consensus of earnings estimates, the bottom line is expected to decline by -12.16% every year for the next 5 years. This gives PONY an adverse growth outlook, let alone a fast one. However, current earnings don’t reflect any of this potential decline in the future, which is a setback for trailing multiples. Buying a stock means you’re entitled to future earnings, not the past. Therefore, it’s more useful to focus on what you’ll receive. To shift our analysis to focus on the future, we will use a forward figure for EBITDA based off analyst forecasts for the year ahead.

PONY’s forward EV/EBITDA = CA$1.19b /CA$195.20m = 6.1x

The 6.15x average multiple for the industry suggests that PONY is valued fairly relative to its peers. which differs from the overvaluation PONY’s past EV/EBITDA ratio suggested.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has 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 ‘s historicals for more clarity.
  3. 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.