A Sliding Share Price Has Us Looking At ONEOK, Inc.'s (NYSE:OKE) P/E Ratio - Yahoo Finance

Unfortunately for some shareholders, the ONEOK (NYSE:OKE) share price has dived 49% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 43% in that time.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for ONEOK

How Does ONEOK's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 12.33 that there is some investor optimism about ONEOK. The image below shows that ONEOK has a higher P/E than the average (7.5) P/E for companies in the oil and gas industry.

NYSE:OKE Price Estimation Relative to Market, March 9th 2020

Its relatively high P/E ratio indicates that ONEOK shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It's great to see that ONEOK grew EPS by 10% in the last year. And earnings per share have improved by 15% annually, over the last five years. So one might expect an above average P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

So What Does ONEOK's Balance Sheet Tell Us?

ONEOK has net debt worth 82% of its market capitalization. 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 ONEOK's P/E Ratio

ONEOK has a P/E of 12.3. That's below the average in the US market, which is 15.1. The company may have significant debt, but EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Given ONEOK's P/E ratio has declined from 24.4 to 12.3 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: ONEOK 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.

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A Sliding Share Price Has Us Looking At ONEOK, Inc.'s (NYSE:OKE) P/E Ratio - Yahoo Finance
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