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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Honkarakenne Oyj's (HEL:HONBS) P/E ratio to inform your assessment of the investment opportunity. Honkarakenne Oyj has a price to earnings ratio of 11.63, based on the last twelve months. That is equivalent to an earnings yield of about 8.6%.
Check out our latest analysis for Honkarakenne Oyj
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Honkarakenne Oyj:
P/E of 11.63 = €2.34 ÷ €0.20 (Based on the year to December 2018.)
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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
It's nice to see that Honkarakenne Oyj grew EPS by a stonking 36% in the last year.
Does Honkarakenne Oyj Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below Honkarakenne Oyj has a P/E ratio that is fairly close for the average for the consumer durables industry, which is 11.8.
Honkarakenne Oyj's P/E tells us that market participants think its prospects are roughly in line with 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.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.