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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 Motor Oil (Hellas) Corinth Refineries S.A.'s (ATH:MOH) P/E ratio to inform your assessment of the investment opportunity. What is Motor Oil (Hellas) Corinth Refineries's P/E ratio? Well, based on the last twelve months it is 8.76. That means that at current prices, buyers pay €8.76 for every €1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Motor Oil (Hellas) Corinth Refineries:
P/E of 8.76 = €20.36 ÷ €2.32 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Motor Oil (Hellas) Corinth Refineries saw earnings per share decrease by 18% last year. But over the longer term (3 years), earnings per share have increased by 7.9%.
How Does Motor Oil (Hellas) Corinth Refineries's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Motor Oil (Hellas) Corinth Refineries has a lower P/E than the average (10.2) in the oil and gas industry classification.
Motor Oil (Hellas) Corinth Refineries'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 Motor Oil (Hellas) Corinth Refineries, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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 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.
So What Does Motor Oil (Hellas) Corinth Refineries's Balance Sheet Tell Us?
Net debt totals 11% of Motor Oil (Hellas) Corinth Refineries's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Motor Oil (Hellas) Corinth Refineries's P/E Ratio
Motor Oil (Hellas) Corinth Refineries trades on a P/E ratio of 8.8, which is below the GR market average of 15. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Motor Oil (Hellas) Corinth Refineries. 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).
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 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. Thank you for reading.