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 ASR Nederland N.V.’s (AMS:ASRNL) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, ASR Nederland’s P/E ratio is 6.46. That means that at current prices, buyers pay €6.46 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 ASR Nederland:
P/E of 6.46 = €38.26 ÷ €5.92 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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 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 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
ASR Nederland increased earnings per share by a whopping 38% last year. And earnings per share have improved by 24% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does ASR Nederland’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that ASR Nederland has a lower P/E than the average (12.1) P/E for companies in the insurance industry.
Its relatively low P/E ratio indicates that ASR Nederland shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
ASR Nederland’s Balance Sheet
Since ASR Nederland holds net cash of €560m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On ASR Nederland’s P/E Ratio
ASR Nederland has a P/E of 6.5. That’s below the average in the NL market, which is 15.7. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: ASR Nederland 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).
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 email@example.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.