Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Hornbach Holding AG & Co. KGaA's (ETR:HBH) P/E ratio could help you assess the value on offer. What is Hornbach Holding KGaA's P/E ratio? Well, based on the last twelve months it is 10.43. That means that at current prices, buyers pay €10.43 for every €1 in trailing yearly profits.
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 Holding KGaA:
P/E of 10.43 = €54.90 ÷ €5.26 (Based on the year to August 2019.)
Is A High Price-to-Earnings 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 Holding KGaA Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (11.0) for companies in the specialty retail industry is roughly the same as Hornbach Holding KGaA's P/E.
Its P/E ratio suggests that Hornbach Holding KGaA shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Hornbach Holding KGaA actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by Hornbach Holding KGaA earnings growth of 14% in the last year. And earnings per share have improved by 2.0% annually, over the last three years. So one might expect an above average P/E ratio.
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. 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.
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).
Is Debt Impacting Hornbach Holding KGaA's P/E?
Hornbach Holding KGaA has net debt equal to 33% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Hornbach Holding KGaA's P/E Ratio
Hornbach Holding KGaA has a P/E of 10.4. That's below the average in the DE market, which is 20.0. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
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 Hornbach Holding KGaA. 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 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.