Don't Sell Heidelberger Druckmaschinen Aktiengesellschaft (FRA:HDD) Before You Read This

Simply Wall St

Mon, Jun 24, 2019, 1:48 AM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Heidelberger Druckmaschinen Aktiengesellschaft's (FRA:HDD), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Heidelberger Druckmaschinen has a P/E ratio of 18.78. That means that at current prices, buyers pay €18.78 for every €1 in trailing yearly profits.

Check out our latest analysis for Heidelberger Druckmaschinen

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 Heidelberger Druckmaschinen:

P/E of 18.78 = €1.4 ÷ €0.075 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 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.'

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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Heidelberger Druckmaschinen's 51% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The cherry on top is that the five year growth rate was an impressive 37% per year. With that kind of growth rate we would generally expect a high P/E ratio. On the other hand, the longer term performance is poor, with EPS down -37% per year over 3 years.

How Does Heidelberger Druckmaschinen's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Heidelberger Druckmaschinen has a higher P/E than the average company (16.3) in the machinery industry.

DB:HDD Price Estimation Relative to Market, June 24th 2019

Heidelberger Druckmaschinen's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.