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 Hallenstein Glasson Holdings Limited's (NZSE:HLG) P/E ratio to inform your assessment of the investment opportunity. Hallenstein Glasson Holdings has a price to earnings ratio of 12.41, based on the last twelve months. In other words, at today's prices, investors are paying NZ$12.41 for every NZ$1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Hallenstein Glasson Holdings:
P/E of 12.41 = NZ$6.04 ÷ NZ$0.49 (Based on the year to August 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NZ$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Hallenstein Glasson Holdings's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (13.1) for companies in the specialty retail industry is roughly the same as Hallenstein Glasson Holdings's P/E.
Hallenstein Glasson Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Hallenstein Glasson Holdings actually outperforms its peers going forward, that should be a positive for the share price. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Hallenstein Glasson Holdings increased earnings per share by 6.1% last year. And its annual EPS growth rate over 5 years is 15%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Hallenstein Glasson Holdings's Balance Sheet
Hallenstein Glasson Holdings has net cash of NZ$17m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Hallenstein Glasson Holdings's P/E Ratio
Hallenstein Glasson Holdings has a P/E of 12.4. That's below the average in the NZ market, which is 19.4. EPS was up modestly better over the last twelve months. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Hallenstein Glasson Holdings. 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 email@example.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.