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Despite Its High P/E Ratio, Is Hellenic Exchanges - Athens Stock Exchange SA (ATH:EXAE) Still Undervalued?

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Hellenic Exchanges - Athens Stock Exchange SA's (ATH:EXAE) P/E ratio to inform your assessment of the investment opportunity. Hellenic Exchanges - Athens Stock Exchange has a price to earnings ratio of 41.84, based on the last twelve months. That is equivalent to an earnings yield of about 2.4%.

Check out our latest analysis for Hellenic Exchanges - Athens Stock Exchange

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Hellenic Exchanges - Athens Stock Exchange:

P/E of 41.84 = €4.59 ÷ €0.11 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings 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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Hellenic Exchanges - Athens Stock Exchange's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Hellenic Exchanges - Athens Stock Exchange has a higher P/E than the average (20.5) P/E for companies in the capital markets industry.

ATSE:EXAE Price Estimation Relative to Market, December 1st 2019

Hellenic Exchanges - Athens Stock Exchange's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Hellenic Exchanges - Athens Stock Exchange's earnings made like a rocket, taking off 108% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 7.0%. Unfortunately, earnings per share are down 4.2% a year, over 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Hellenic Exchanges - Athens Stock Exchange's Balance Sheet

With net cash of €71m, Hellenic Exchanges - Athens Stock Exchange has a very strong balance sheet, which may be important for its business. Having said that, at 26% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Hellenic Exchanges - Athens Stock Exchange's P/E Ratio

Hellenic Exchanges - Athens Stock Exchange's P/E is 41.8 which is above average (16.3) in its market. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Hellenic Exchanges - Athens Stock Exchange to have a high P/E ratio.

Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.