This ASX 200 share has a P/E ratio of just 2! Is it actually cheap?

Is a P/E ratio of 2.17 too cheap to ignore?

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Looking at the Whitehaven Coal Ltd (ASX: WHC) share price today, it's likely one metric will jump out at you – this ASX 200 coal share's extraordinarily low price-to-earnings (P/E) ratio. Alright, maybe two. Whitehaven shares are also sporting a trailing dividend yield of more than 11%.

But today, let's talk about Whitehaven's seemingly stupendous P/E ratio of just 2.17.

A company's P/E ratio tells us what investors are paying for each dollar of earnings that a company brings in. In this way, it is a great metric to use when comparing different companies' share prices, especially companies that all operate within the same sector.

A typical P/E ratio on the ASX 200 right now would be around 20.

For instance, Commonwealth Bank of Australia (ASX: CBA) shares currently trade at a P/E ratio of 17.3. Coles Group Ltd (ASX: COL) is slightly higher at 20.2. Telstra Group Ltd (ASX: TLS)  and Woolworths Group Ltd (ASX: WOW) are higher again with P/E ratios of 24.1 and 28.8 respectively.

But 2.17? That seems far too cheap to ignore. So does this mean Whitehaven shares are a screaming bargain today?

Well, perhaps. And perhaps not. It's not as simple as you may think, or hope.

Why does this ASX 200 share have a P/E ratio of 2.17?

First of all, Whitehaven's earning multiple of 2.17 checks out. Last month, Whitehaven informed the markets that it had brought in a total of $3.077 in basic earnings per share (EPS) for the 2023 financial year. That was up 55.7% from $1.978 per share over FY22.

Dividing the current Whitehaven share price of $6.69 by this $3.077 in earnings per share, and we indeed get a P/E ratio of 2.17.

But there's a problem. Whitehaven is probably not the best company to use the P/E ratio on to determine whether it is cheap.

The P/E ratio works best for companies that have stable and predictable earnings. That way, we can use it to work out whether a company is cheap today based on what it might earn in the future.

But Whitehaven doesn't really work too well in this scenario. That's because it is an ASX 200 coal share. Like any resources or energy stock, Whitehaven's profitability is almost entirely dependent on what the price of the commodity it sells is doing.

As it happens, the past two years have seen coal prices reach record heights. That's why Whitehaven was able to go from paying an annual total of 28 cents per share in dividends over 2019 to the 74 cents per share investors have received in 2023.

Cheap? Yes. Good value? Maybe.

But coal has dramatically come off the boil over the past year. Back in September 2022, coal was asking more than US$400 per tonne. Today, that same tonne can be purchased for around US$160. That's still elevated by historical standards, but obviously not as much as it was.

Unless coal prices sharply rebound, this makes it highly unlikely Whitehaven will be able to report anything close to $3.077 in EPS in FY2024.

Say this ASX 200 share instead brings in 58.5 cents in EPS this financial year (the same as it did in FY19). Then, instead of a P/E ratio of 2.17, it would be boasting one of 11.44.

That's still low, mind you. But it just goes to show how fickle a P/E ratio can be for an ASX 200 share like Whitehaven.

There are probably other factors depressing the Whitehaven share price as well, which contributes to a low P/E ratio. This is a coal company at the end of the day. Many ASX 200 investors and funds don't want to own Whitehaven shares due to ESG concerns. And investors simply don't know how long coal mines will be viable for.

Coal might well still have a role in the global economy in 20 or 30 years' time. But many investors (and people in general) are hoping it won't. This is probably leading to Whitehaven's minimum assets commanding lower valuations than they otherwise might.

So there's a lot going on here. But we can conclude that Whitehaven shares look cheap today, whichever way you spin it. But the ASX 200 share is also cheap for a reason. And investors need to consider that reason before chasing this low share price.

Motley Fool contributor Sebastian Bowen has positions in Telstra Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group and Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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