This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Hewlett Packard Enterprise Company's (NYSE:HPE) P/E ratio to inform your assessment of the investment opportunity. Hewlett Packard Enterprise has a price to earnings ratio of 20.13, based on the last twelve months. That is equivalent to an earnings yield of about 5.0%.
How Do I Calculate Hewlett Packard Enterprise's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Hewlett Packard Enterprise:
P/E of 20.13 = $15.61 ÷ $0.78 (Based on the trailing twelve months to October 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. 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 Hewlett Packard Enterprise 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. You can see in the image below that the average P/E (20.9) for companies in the tech industry is roughly the same as Hewlett Packard Enterprise's P/E.
Hewlett Packard Enterprise's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Hewlett Packard Enterprise shrunk earnings per share by 41% over the last year. And over the longer term (5 years) earnings per share have decreased 3.2% annually. This might lead to muted expectations.
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. That means it doesn't take debt or cash into account. 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).
Hewlett Packard Enterprise's Balance Sheet
Net debt is 50% of Hewlett Packard Enterprise's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Hewlett Packard Enterprise's P/E Ratio
Hewlett Packard Enterprise has a P/E of 20.1. That's higher than the average in its market, which is 18.1. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Hewlett Packard Enterprise. 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.
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