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Why Chr. Hansen Holding A/S’s (CPH:CHR) High P/E Ratio Isn’t Necessarily A Bad Thing

Andy Nguyen

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Chr. Hansen Holding A/S’s (CPH:CHR) P/E ratio and reflect on what it tells us about the company’s share price. Chr. Hansen Holding has a P/E ratio of 46.88, based on the last twelve months. That is equivalent to an earnings yield of about 2.1%.

View our latest analysis for Chr. Hansen Holding

How Do You Calculate Chr. Hansen Holding’s P/E Ratio?

The formula for price to earnings is:

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

Or for Chr. Hansen Holding:

P/E of 46.88 = €83.2 (Note: this is the share price in the reporting currency, namely, EUR ) ÷ €1.77 (Based on the year to November 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each DKK1 of company earnings. 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

Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.

Chr. Hansen Holding increased earnings per share by 4.8% last year. And it has bolstered its earnings per share by 13% per year over the last five years.

How Does Chr. Hansen Holding’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Chr. Hansen Holding has a higher P/E than the average (16.9) P/E for companies in the chemicals industry.

CPSE:CHR PE PEG Gauge January 24th 19

Its relatively high P/E ratio indicates that Chr. Hansen Holding 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 delve deeper. I like to check if company insiders have been buying or selling.

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

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Chr. Hansen Holding’s P/E?

Net debt totals just 6.6% of Chr. Hansen Holding’s market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Chr. Hansen Holding’s P/E Ratio

Chr. Hansen Holding trades on a P/E ratio of 46.9, which is above the DK market average of 16.1. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.