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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 Hiolle Industries S.A.'s (EPA:ALHIO), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Hiolle Industries has a P/E ratio of 11.54. That corresponds to an earnings yield of approximately 8.7%.
Check out our latest analysis for Hiolle Industries
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Hiolle Industries:
P/E of 11.54 = €4.26 ÷ €0.37 (Based on the trailing twelve months to December 2018.)
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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Hiolle Industries grew EPS like Taylor Swift grew her fan base back in 2010; the 159% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 38% per year. With that kind of growth rate we would generally expect a high P/E ratio.
How Does Hiolle Industries's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (12) for companies in the machinery industry is roughly the same as Hiolle Industries's P/E.
That indicates that the market expects Hiolle Industries will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I inform my view byby checking management tenure and remuneration, among other things.
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. 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.