Here's What Detection Technology Oyj's (HEL:DETEC) P/E Is Telling Us
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Detection Technology Oyj's (HEL:DETEC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Detection Technology Oyj's P/E ratio is 23.10. That corresponds to an earnings yield of approximately 4.3%.
See our latest analysis for Detection Technology Oyj
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 Detection Technology Oyj:
P/E of 23.10 = €20.100 ÷ €0.870 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
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 Does Detection Technology Oyj's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (12.1) for companies in the electronic industry is lower than Detection Technology Oyj's P/E.
Detection Technology Oyj'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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
Detection Technology Oyj saw earnings per share decrease by 16% last year. But it has grown its earnings per share by 28% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
Is Debt Impacting Detection Technology Oyj's P/E?
Detection Technology Oyj has net cash of €20m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Detection Technology Oyj's P/E Ratio
Detection Technology Oyj's P/E is 23.1 which is above average (16.6) in its market. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Detection Technology Oyj 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.
