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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. Austevoll Seafood has a P/E ratio of 12.73, based on the last twelve months. That means that at current prices, buyers pay NOK12.73 for every NOK1 in trailing yearly profits.
How Do You Calculate Austevoll Seafood's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Austevoll Seafood:
P/E of 12.73 = NOK94.35 ÷ NOK7.41 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Austevoll Seafood's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Austevoll Seafood has a lower P/E than the average (17.9) P/E for companies in the food industry.
This suggests that market participants think Austevoll Seafood will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Austevoll Seafood shrunk earnings per share by 16% over the last year. But over the longer term (5 years) earnings per share have increased by 13%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).
So What Does Austevoll Seafood's Balance Sheet Tell Us?
Austevoll Seafood has net debt equal to 27% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Austevoll Seafood's P/E Ratio
Austevoll Seafood's P/E is 12.7 which is about average (13.4) in the NO market. With modest debt, and a lack of recent growth, it would seem the market is expecting improvement in earnings.
Investors have an opportunity when market expectations about a stock are wrong. 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
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. Thank you for reading.