Read This Before You Buy Koenig & Bauer AG (FRA:SKB) Because Of Its P/E Ratio
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Koenig & Bauer AG's (FRA:SKB), to help you decide if the stock is worth further research. Koenig & Bauer has a price to earnings ratio of 10.43, based on the last twelve months. In other words, at today's prices, investors are paying €10.43 for every €1 in prior year profit.
View our latest analysis for Koenig & Bauer
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 Koenig & Bauer:
P/E of 10.43 = €40.26 ÷ €3.86 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Koenig & Bauer shrunk earnings per share by 21% over the last year. But it has grown its earnings per share by 34% per year over the last three years.
How Does Koenig & Bauer'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 Koenig & Bauer has a lower P/E than the average (17.2) in the machinery industry classification.
Its relatively low P/E ratio indicates that Koenig & Bauer shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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).
So What Does Koenig & Bauer's Balance Sheet Tell Us?
The extra options and safety that comes with Koenig & Bauer's €61m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Koenig & Bauer's P/E Ratio
Koenig & Bauer trades on a P/E ratio of 10.4, which is below the DE market average of 19.3. The recent drop in earnings per share would almost certainly temper expectations, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Koenig & Bauer may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.