Do You Know What Huchems Fine Chemical Corporation's (KRX:069260) P/E Ratio Means?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Huchems Fine Chemical Corporation's (KRX:069260) P/E ratio could help you assess the value on offer. Based on the last twelve months, Huchems Fine Chemical's P/E ratio is 11.68. That means that at current prices, buyers pay ₩11.68 for every ₩1 in trailing yearly profits.

View our latest analysis for Huchems Fine Chemical

How Do You Calculate Huchems Fine Chemical's P/E Ratio?

The formula for price to earnings is:

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

Or for Huchems Fine Chemical:

P/E of 11.68 = ₩22650.00 ÷ ₩1939.00 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Huchems Fine Chemical 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. You can see in the image below that the average P/E (12.4) for companies in the chemicals industry is roughly the same as Huchems Fine Chemical's P/E.

Huchems Fine Chemical's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Huchems Fine Chemical actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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. 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.

Huchems Fine Chemical shrunk earnings per share by 35% over the last year. But it has grown its earnings per share by 11% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. 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.

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.

How Does Huchems Fine Chemical's Debt Impact Its P/E Ratio?

With net cash of ₩257b, Huchems Fine Chemical has a very strong balance sheet, which may be important for its business. Having said that, at 29% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Huchems Fine Chemical's P/E Ratio

Huchems Fine Chemical has a P/E of 11.7. That's below the average in the KR market, which is 15.0. The recent drop in earnings per share would make investors cautious, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.

You might be able to find a better buy than Huchems Fine Chemical. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.