Don't Sell Koninklijke DSM N.V. (AMS:DSM) 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 show how you can use Koninklijke DSM N.V.'s (AMS:DSM) P/E ratio to inform your assessment of the investment opportunity. What is Koninklijke DSM's P/E ratio? Well, based on the last twelve months it is 23.20. That is equivalent to an earnings yield of about 4.3%.
Check out our latest analysis for Koninklijke DSM
How Do You Calculate Koninklijke DSM's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Koninklijke DSM:
P/E of 23.20 = €116.55 ÷ €5.02 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Koninklijke DSM 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 Koninklijke DSM has a P/E ratio that is roughly in line with the chemicals industry average (23.2).
That indicates that the market expects Koninklijke DSM will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Koninklijke DSM's earnings per share fell by 11% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 51%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
Is Debt Impacting Koninklijke DSM's P/E?
Koninklijke DSM has net debt worth just 2.8% 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 Bottom Line On Koninklijke DSM's P/E Ratio
Koninklijke DSM has a P/E of 23.2. That's higher than the average in its market, which is 20.5. With some debt but no EPS growth last year, the market has high expectations of future profits.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
But note: Koninklijke DSM may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
