Is Terveystalo Oyj's (HEL:TTALO) P/E Ratio Really That Good?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Terveystalo Oyj's (HEL:TTALO), to help you decide if the stock is worth further research. What is Terveystalo Oyj's P/E ratio? Well, based on the last twelve months it is 19.72. That means that at current prices, buyers pay €19.72 for every €1 in trailing yearly profits.
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See our latest analysis for Terveystalo Oyj
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 Terveystalo Oyj:
P/E of 19.72 = €9.18 ÷ €0.47 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Terveystalo Oyj's 95% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. And earnings per share have improved by 538% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Does Terveystalo Oyj Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (20.6) for companies in the healthcare industry is roughly the same as Terveystalo Oyj's P/E.
That indicates that the market expects Terveystalo Oyj will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Terveystalo Oyj's Balance Sheet Tell Us?
Terveystalo Oyj's net debt equates to 49% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Terveystalo Oyj's P/E Ratio
Terveystalo Oyj's P/E is 19.7 which is about average (19.9) in the FI market. Given it has reasonable debt levels, and grew earnings strongly last year, the P/E indicates the market has doubts this growth can be sustained.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Terveystalo Oyj. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 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. Thank you for reading.
