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Should We Worry About Hawaiian Electric Industries, Inc.'s (NYSE:HE) P/E Ratio?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Hawaiian Electric Industries, Inc.'s (NYSE:HE) P/E ratio and reflect on what it tells us about the company's share price. Hawaiian Electric Industries has a P/E ratio of 24.63, based on the last twelve months. That means that at current prices, buyers pay $24.63 for every $1 in trailing yearly profits.

View our latest analysis for Hawaiian Electric Industries

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Hawaiian Electric Industries:

P/E of 24.63 = $45.49 ÷ $1.85 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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.

Does Hawaiian Electric Industries 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. As you can see below Hawaiian Electric Industries has a P/E ratio that is fairly close for the average for the electric utilities industry, which is 24.6.

NYSE:HE Price Estimation Relative to Market, January 11th 2020

Its P/E ratio suggests that Hawaiian Electric Industries shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Hawaiian Electric Industries's earnings per share grew by -8.9% in the last twelve months. And earnings per share have improved by 1.5% annually, over the last five years. In contrast, EPS has decreased by 6.8%, annually, over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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 Hawaiian Electric Industries's P/E?

Hawaiian Electric Industries has net debt equal to 40% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Hawaiian Electric Industries's P/E Ratio

Hawaiian Electric Industries trades on a P/E ratio of 24.6, which is above its market average of 18.7. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future.

Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Hawaiian Electric Industries may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.