The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how HORNBACH Baumarkt AG's (ETR:HBM) P/E ratio could help you assess the value on offer. Based on the last twelve months, HORNBACH Baumarkt's P/E ratio is 11.11. In other words, at today's prices, investors are paying €11.11 for every €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 HORNBACH Baumarkt:
P/E of 11.11 = €23.50 ÷ €2.12 (Based on the year to November 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does HORNBACH Baumarkt 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 HORNBACH Baumarkt has a lower P/E than the average (16.1) P/E for companies in the specialty retail industry.
HORNBACH Baumarkt's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with HORNBACH Baumarkt, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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.
HORNBACH Baumarkt increased earnings per share by a whopping 41% last year.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
HORNBACH Baumarkt's Balance Sheet
Net debt is 27% of HORNBACH Baumarkt's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On HORNBACH Baumarkt's P/E Ratio
HORNBACH Baumarkt's P/E is 11.1 which is below average (20.8) in the DE market. The EPS growth last year was strong, and debt levels are quite reasonable. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors have an opportunity when market expectations about a stock are wrong. 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: HORNBACH Baumarkt 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 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.
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