Is Cypress Energy Partners LP (NYSE:CELP) Attractive At This PE Ratio?

This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today's market.

Cypress Energy Partners LP (NYSE:CELP) trades with a trailing P/E of 11.4, which is lower than the industry average of 20.8. Although some investors might think this is a real positive, that might change once you understand the assumptions behind the P/E. In this article, 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 Cypress Energy Partners

Demystifying the P/E ratio

P/E is a popular ratio used for relative valuation. 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.

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 CELP, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.

Since CELP's P/E of 11.4 is lower than its industry peers (20.8), it means that investors are paying less for each dollar of CELP's earnings. This multiple is a median of profitable companies of 24 Commercial Services companies in US including Nutrition Management Services, Eco Energy Tech Asia and QPS Die Cutters and Finishers. You can think of it like this: the market is suggesting that CELP is a weaker business than the average comparable company.

Assumptions to watch out for

However, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to CELP. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with CELP, then investors would naturally value CELP at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with CELP, investors would also value CELP at a lower price since it is a lower growth investment. Both scenarios would explain why CELP has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing CELP to are fairly valued by the market. If this does not hold, there is a possibility that CELP’s P/E is lower because firms in our peer group are being 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 CELP. 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:

1. Financial Health: Are CELP’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has CELP 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 CELP'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.

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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.