Does Holland Colours NV (AMS:HOLCO) Have A Good P/E Ratio?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Holland Colours NV’s (AMS:HOLCO) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Holland Colours’s P/E ratio is 11.15. That corresponds to an earnings yield of approximately 9.0%.
View our latest analysis for Holland Colours
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Holland Colours:
P/E of 11.15 = €77.8 ÷ €6.98 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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.
Holland Colours maintained roughly steady earnings over the last twelve months. But EPS is up 16% over the last 5 years.
How Does Holland Colours’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Holland Colours has a lower P/E than the average (17) in the chemicals industry classification.
Holland Colours’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
How Does Holland Colours’s Debt Impact Its P/E Ratio?
Since Holland Colours holds net cash of €2.4m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Holland Colours’s P/E Ratio
Holland Colours has a P/E of 11.2. That’s below the average in the NL market, which is 14.9. Falling earnings per share are likely to be keeping potential buyers away, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there’s real potential that the low P/E could eventually indicate undervaluation.
Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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.
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.
