HORNBACH Baumarkt (ETR:HBM) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 14% over the last quarter. Unfortunately, the full year gain of 7.2% wasn't so sweet.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for HORNBACH Baumarkt
How Does HORNBACH Baumarkt's P/E Ratio Compare To Its Peers?
HORNBACH Baumarkt's P/E is 8.72. The image below shows that HORNBACH Baumarkt has a P/E ratio that is roughly in line with the specialty retail industry average (8.7).
HORNBACH Baumarkt's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. 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 HORNBACH Baumarkt grew EPS by a stonking 41% in the last year.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
How Does HORNBACH Baumarkt's Debt Impact Its P/E Ratio?
Net debt is 35% of HORNBACH Baumarkt's market cap. While it's worth keeping this in mind, it isn't a worry.