Don't Sell Coca-Cola HBC AG (LON:CCH) Before You Read This
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Coca-Cola HBC AG's (LON:CCH) P/E ratio and reflect on what it tells us about the company's share price. Coca-Cola HBC has a P/E ratio of 28.39, based on the last twelve months. That is equivalent to an earnings yield of about 3.5%.
Check out our latest analysis for Coca-Cola HBC
How Do I Calculate Coca-Cola HBC's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Coca-Cola HBC:
P/E of 28.39 = EUR32.99 (Note: this is the share price in the reporting currency, namely, EUR ) ÷ EUR1.16 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 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.
Does Coca-Cola HBC 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 Coca-Cola HBC has a higher P/E than the average (24.9) P/E for companies in the beverage industry.
Coca-Cola HBC's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Coca-Cola HBC shrunk earnings per share by 5.6% last year. But EPS is up 11% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
So What Does Coca-Cola HBC's Balance Sheet Tell Us?
Coca-Cola HBC has net debt worth just 7.5% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Coca-Cola HBC's P/E Ratio
Coca-Cola HBC has a P/E of 28.4. That's higher than the average in its market, which is 18.3. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Coca-Cola HBC. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
