The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Feelgood Svenska AB (publ)'s (STO:FEEL) P/E ratio and reflect on what it tells us about the company's share price. What is Feelgood Svenska's P/E ratio? Well, based on the last twelve months it is 12.32. In other words, at today's prices, investors are paying SEK12.32 for every SEK1 in prior year profit.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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 Feelgood Svenska:
P/E of 12.32 = SEK2.88 ÷ SEK0.23 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each SEK1 of company earnings. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Feelgood Svenska's earnings per share fell by 4.5% in the last twelve months. But it has grown its earnings per share by 25% per year over the last five years.
Does Feelgood Svenska Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Feelgood Svenska has a lower P/E than the average (15.6) P/E for companies in the healthcare industry.
This suggests that market participants think Feelgood Svenska will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Feelgood Svenska's P/E?
Net debt is 48% of Feelgood Svenska's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Feelgood Svenska's P/E Ratio
Feelgood Svenska trades on a P/E ratio of 12.3, which is below the SE market average of 16.9. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.
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.' We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Feelgood Svenska. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 email@example.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.