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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 ByggPartner i Dalarna Holding AB (publ)'s (STO:BYGGP) P/E ratio could help you assess the value on offer. Based on the last twelve months, ByggPartner i Dalarna Holding's P/E ratio is 11.10. That means that at current prices, buyers pay SEK11.10 for every SEK1 in trailing yearly profits.
Check out our latest analysis for ByggPartner i Dalarna Holding
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 ByggPartner i Dalarna Holding:
P/E of 11.10 = SEK39.30 ÷ SEK3.54 (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 SEK1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does ByggPartner i Dalarna Holding 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. The image below shows that ByggPartner i Dalarna Holding has a lower P/E than the average (13.0) P/E for companies in the construction industry.
Its relatively low P/E ratio indicates that ByggPartner i Dalarna Holding 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It's nice to see that ByggPartner i Dalarna Holding grew EPS by a stonking 25% in the last year. In contrast, EPS has decreased by 5.2%, annually, over 3 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. 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.