A Sliding Share Price Has Us Looking At Stora Enso Oyj's (HEL:STERV) P/E Ratio
To the annoyance of some shareholders, Stora Enso Oyj (HEL:STERV) shares are down a considerable 31% in the last month. Even longer term holders have taken a real hit with the stock declining 28% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for Stora Enso Oyj
How Does Stora Enso Oyj's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 7.66 that sentiment around Stora Enso Oyj isn't particularly high. The image below shows that Stora Enso Oyj has a lower P/E than the average (9.4) P/E for companies in the forestry industry.
This suggests that market participants think Stora Enso Oyj will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Stora Enso Oyj saw earnings per share decrease by 13% last year. But it has grown its earnings per share by 55% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
Is Debt Impacting Stora Enso Oyj's P/E?
Stora Enso Oyj has net debt equal to 37% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Stora Enso Oyj's P/E Ratio
Stora Enso Oyj has a P/E of 7.7. That's below the average in the FI market, which is 16.0. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Stora Enso Oyj's P/E ratio has declined from 11.2 to 7.7 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors should be looking to buy stocks that the market is wrong about. 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.
Of course you might be able to find a better stock than Stora Enso Oyj. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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. Thank you for reading.
