Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Dalhoff Larsen & Horneman A/S's (CPH:DLH) P/E ratio and reflect on what it tells us about the company's share price. What is Dalhoff Larsen & Horneman's P/E ratio? Well, based on the last twelve months it is 11.45. In other words, at today's prices, investors are paying DKK11.45 for every DKK1 in prior year profit.
View our latest analysis for Dalhoff Larsen & Horneman
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Dalhoff Larsen & Horneman:
P/E of 11.45 = DKK1.43 ÷ DKK0.12 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each DKK1 the company has earned over the last year. 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 Dalhoff Larsen & Horneman's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (11.4) for companies in the trade distributors industry is roughly the same as Dalhoff Larsen & Horneman's P/E.
Dalhoff Larsen & Horneman's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Dalhoff Larsen & Horneman actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. 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.
Dalhoff Larsen & Horneman saw earnings per share decrease by 58% last year.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.