Yahoo Finance Should You Be Tempted To Sell AB Electrolux (publ) (STO:ELUX B) Because Of Its P/E Ratio?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how AB Electrolux (publ)'s (STO:ELUX B) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, AB Electrolux has a P/E ratio of 17.15. That is equivalent to an earnings yield of about 5.8%.
See our latest analysis for AB Electrolux
How Do I Calculate AB Electrolux's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for AB Electrolux:
P/E of 17.15 = SEK235.60 ÷ SEK13.74 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does AB Electrolux's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that AB Electrolux has a higher P/E than the average (13.9) P/E for companies in the consumer durables industry.
That means that the market expects AB Electrolux will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
AB Electrolux shrunk earnings per share by 12% over the last year. But it has grown its earnings per share by 255% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does AB Electrolux's Balance Sheet Tell Us?
AB Electrolux's net debt is 5.5% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On AB Electrolux's P/E Ratio
AB Electrolux's P/E is 17.1 which is about average (16.2) in the SE market. When you consider the lack of EPS growth last year (along with some debt), it seems the market is optimistic about the future for the business.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
