Does H+H International A/S’s (CPH:HH) PE Ratio Signal A Buying Opportunity?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
H+H International A/S (CPH:HH) is trading with a trailing P/E of 14.6x, which is lower than the industry average of 15.3x. While this makes HH appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for H+H International
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for HH
Price-Earnings Ratio = Price per share ÷ Earnings per share
HH Price-Earnings Ratio = DKK93.9 ÷ DKK6.435 = 14.6x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to HH, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 14.6x, HH’s P/E is lower than its industry peers (17.2x). This implies that investors are undervaluing each dollar of HH’s earnings. Since the sector in is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the multiple, which is a median of profitable companies of companies such as , and . As such, our analysis shows that HH represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that HH is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to HH, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with HH, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing HH to are fairly valued by the market. If this is violated, HH’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of HH to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HH’s future growth? Take a look at our free research report of analyst consensus for HH’s outlook.
Past Track Record: Has HH been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of HH’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
