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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 Austevoll Seafood ASA's (OB:AUSS) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Austevoll Seafood's P/E ratio is 12.78. That means that at current prices, buyers pay NOK12.78 for every NOK1 in trailing yearly profits.
How Do I Calculate Austevoll Seafood's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Austevoll Seafood:
P/E of 12.78 = NOK79.500 ÷ NOK6.220 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NOK1 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 Austevoll Seafood 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 Austevoll Seafood has a lower P/E than the average (18.2) P/E for companies in the food industry.
This suggests that market participants think Austevoll Seafood will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Austevoll Seafood shrunk earnings per share by 45% over the last year. But over the longer term (5 years) earnings per share have increased by 18%. And over the longer term (3 years) earnings per share have decreased 8.7% annually. This could justify a low P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
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.
How Does Austevoll Seafood's Debt Impact Its P/E Ratio?
Net debt is 25% of Austevoll Seafood's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Austevoll Seafood's P/E Ratio
Austevoll Seafood has a P/E of 12.8. That's higher than the average in its market, which is 10.8. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.
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.
Of course you might be able to find a better stock than Austevoll Seafood. 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 firstname.lastname@example.org. 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.