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 Olav Thon Eiendomsselskap ASA's (OB:OLT) P/E ratio to inform your assessment of the investment opportunity. What is Olav Thon Eiendomsselskap's P/E ratio? Well, based on the last twelve months it is 6.58. In other words, at today's prices, investors are paying NOK6.58 for every NOK1 in prior year profit.
How Do You Calculate Olav Thon Eiendomsselskap's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Olav Thon Eiendomsselskap:
P/E of 6.58 = NOK118.500 ÷ NOK18.000 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NOK1 the company has earned over the last year. 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 Does Olav Thon Eiendomsselskap's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Olav Thon Eiendomsselskap has a lower P/E than the average (8.5) in the real estate industry classification.
Its relatively low P/E ratio indicates that Olav Thon Eiendomsselskap shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Olav Thon Eiendomsselskap, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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.
Olav Thon Eiendomsselskap shrunk earnings per share by 24% over the last year. But it has grown its earnings per share by 10% per year over the last five years. And EPS is down 19% a year, over the last 3 years. This might lead to low expectations.
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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Olav Thon Eiendomsselskap's Balance Sheet
Net debt totals a substantial 183% of Olav Thon Eiendomsselskap's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Olav Thon Eiendomsselskap's P/E Ratio
Olav Thon Eiendomsselskap trades on a P/E ratio of 6.6, which is below the NO market average of 10.7. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Olav Thon Eiendomsselskap. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.