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Do You Like Elekta AB (publ) (STO:EKTA B) At This P/E Ratio?

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Simply Wall St
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Elekta AB (publ)'s (STO:EKTA B), to help you decide if the stock is worth further research. Based on the last twelve months, Elekta's P/E ratio is 42.26. That is equivalent to an earnings yield of about 2.4%.

Check out our latest analysis for Elekta

How Do You Calculate Elekta's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Elekta:

P/E of 42.26 = SEK123.35 ÷ SEK2.92 (Based on the year to October 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each SEK1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

Does Elekta Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Elekta has a lower P/E than the average (50.9) P/E for companies in the medical equipment industry.

OM:EKTA B Price Estimation Relative to Market, December 31st 2019
OM:EKTA B Price Estimation Relative to Market, December 31st 2019

Its relatively low P/E ratio indicates that Elekta shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Elekta, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.

Elekta saw earnings per share decrease by 14% last year. But it has grown its earnings per share by 1.6% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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.

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 Elekta's P/E?

Net debt totals just 3.2% of Elekta's market cap. 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 Elekta's P/E Ratio

Elekta trades on a P/E ratio of 42.3, which is above its market average of 19.1. With some debt but no EPS growth last year, the market has high expectations of future profits.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Elekta. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.