In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Heidelberger Druckmaschinen Aktiengesellschaft's (FRA:HDD) P/E ratio to inform your assessment of the investment opportunity. Heidelberger Druckmaschinen has a price to earnings ratio of 18.78, based on the last twelve months. That corresponds to an earnings yield of approximately 5.3%.
View our latest analysis for Heidelberger Druckmaschinen
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E 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 trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
In the last year, Heidelberger Druckmaschinen grew EPS like Taylor Swift grew her fan base back in 2010; the 51% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 37% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio. Unfortunately, earnings per share are down 12% a year, over 3 years.
How Does Heidelberger Druckmaschinen's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Heidelberger Druckmaschinen has a higher P/E than the average company (16.3) in the machinery industry.
Its relatively high P/E ratio indicates that Heidelberger Druckmaschinen shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or 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. Thus, the metric does not reflect cash or debt held by the company. 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.