This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how H&R GmbH & Co. KGaA's (ETR:2HRA) P/E ratio could help you assess the value on offer. H&R GmbH KGaA has a P/E ratio of 11.75, based on the last twelve months. That means that at current prices, buyers pay €11.75 for every €1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for H&R GmbH KGaA:
P/E of 11.75 = €5.30 ÷ €0.45 (Based on the trailing twelve months to June 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. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does H&R GmbH KGaA's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see H&R GmbH KGaA has a lower P/E than the average (20.2) in the chemicals industry classification.
Its relatively low P/E ratio indicates that H&R GmbH KGaA shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with H&R GmbH KGaA, 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
If earnings fall then in the future the 'E' will be lower. 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.
H&R GmbH KGaA shrunk earnings per share by 36% over the last year. And over the longer term (3 years) earnings per share have decreased 22% 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. 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.
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.
Is Debt Impacting H&R GmbH KGaA's P/E?
H&R GmbH KGaA has net debt equal to 37% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On H&R GmbH KGaA's P/E Ratio
H&R GmbH KGaA has a P/E of 11.7. That's below the average in the DE market, which is 19.2. 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. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: H&R GmbH KGaA 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).
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.