This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Husky Energy Inc.'s (TSE:HSE) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Husky Energy's P/E ratio is 6.73. In other words, at today's prices, investors are paying CA$6.73 for every CA$1 in prior year profit.
View our latest analysis for Husky Energy
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 Husky Energy:
P/E of 6.73 = CA$9.54 ÷ CA$1.42 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CA$1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Husky Energy Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (9.1) for companies in the oil and gas industry is higher than Husky Energy's P/E.
Its relatively low P/E ratio indicates that Husky Energy shareholders think it will struggle to do as well as other companies in its industry classification. 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. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Husky Energy's earnings per share fell by 3.1% in the last twelve months. And EPS is down 6.7% a year, over the last 5 years. So you wouldn't expect a very high P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
Is Debt Impacting Husky Energy's P/E?
Husky Energy's net debt equates to 38% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Husky Energy's P/E Ratio
Husky Energy's P/E is 6.7 which is below average (14.0) in the CA market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
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 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 Husky Energy. 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.