The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Olvi Oyj's (HEL:OLVAS) P/E ratio and reflect on what it tells us about the company's share price. Olvi Oyj has a P/E ratio of 21.03, based on the last twelve months. That means that at current prices, buyers pay €21.03 for every €1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Olvi Oyj:
P/E of 21.03 = €40.70 ÷ €1.94 (Based on the year to September 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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Olvi Oyj's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below Olvi Oyj has a P/E ratio that is fairly close for the average for the beverage industry, which is 20.8.
Its P/E ratio suggests that Olvi Oyj shareholders think that in the future it will perform about the same as other companies in its industry classification.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Olvi Oyj maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 3.7%. The company could impress by growing EPS, in the future. I would further inform my view by checking insider buying and selling., among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
So What Does Olvi Oyj's Balance Sheet Tell Us?
Since Olvi Oyj holds net cash of €27m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Olvi Oyj's P/E Ratio
Olvi Oyj trades on a P/E ratio of 21.0, which is above its market average of 19.4. Earnings improved over the last year. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen!
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 be able to find a better stock than Olvi Oyj. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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