Does CONSOL Energy Inc.’s (NYSE:CEIX) P/E Ratio Signal A Buying Opportunity?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at CONSOL Energy Inc.’s (NYSE:CEIX) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, CONSOL Energy’s P/E ratio is 6.8. That corresponds to an earnings yield of approximately 15%.

Check out our latest analysis for CONSOL Energy

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for CONSOL Energy:

P/E of 6.8 = $37.24 ÷ $5.48 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

It’s nice to see that CONSOL Energy grew EPS by a stonking 127% in the last year. Unfortunately, earnings per share are down 35% a year, over 3 years.

How Does CONSOL Energy’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that CONSOL Energy has a lower P/E than the average (12.2) P/E for companies in the oil and gas industry.

NYSE:CEIX Price Estimation Relative to Market, February 26th 2019
NYSE:CEIX Price Estimation Relative to Market, February 26th 2019

Its relatively low P/E ratio indicates that CONSOL Energy shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

CONSOL Energy’s Balance Sheet

CONSOL Energy’s net debt is 62% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On CONSOL Energy’s P/E Ratio

CONSOL Energy trades on a P/E ratio of 6.8, which is below the US market average of 17.6. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than CONSOL Energy. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.