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Should You Be Tempted To Sell Nordic Semiconductor ASA (OB:NOD) Because Of Its P/E Ratio?

Rowena Gregory

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Nordic Semiconductor ASA’s (OB:NOD) P/E ratio and reflect on what it tells us about the company’s share price. Nordic Semiconductor has a price to earnings ratio of 53, based on the last twelve months. That corresponds to an earnings yield of approximately 1.9%.

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How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Nordic Semiconductor:

P/E of 53 = $3.49 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.066 (Based on the trailing twelve months to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each NOK1 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 Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. 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.

Notably, Nordic Semiconductor grew EPS by a whopping 35% in the last year. In contrast, EPS has decreased by 11%, annually, over 5 years.

How Does Nordic Semiconductor’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 Nordic Semiconductor has a significantly higher P/E than the average (16.2) P/E for companies in the semiconductor industry.

OB:NOD PE PEG Gauge January 11th 19

Its relatively high P/E ratio indicates that Nordic Semiconductor shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

How Does Nordic Semiconductor’s Debt Impact Its P/E Ratio?

The extra options and safety that comes with Nordic Semiconductor’s US$95m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Nordic Semiconductor’s P/E Ratio

Nordic Semiconductor has a P/E of 53. That’s significantly higher than the average in the NO market, which is 12.7. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company

Investors should be looking to buy stocks that the market is wrong about. 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 they key to an excellent investment decision.

You might be able to find a better buy than Nordic Semiconductor. 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.