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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Harworth Group plc's (LON:HWG) P/E ratio to inform your assessment of the investment opportunity. What is Harworth Group's P/E ratio? Well, based on the last twelve months it is 11.82. In other words, at today's prices, investors are paying £11.82 for every £1 in prior year profit.
View our latest analysis for Harworth Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Harworth Group:
P/E of 11.82 = £1.26 ÷ £0.11 (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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Harworth Group's earnings per share fell by 33% in the last twelve months. But it has grown its earnings per share by 10% per year over the last five years. And it has shrunk its earnings per share by 30% per year over the last three years. This growth rate might warrant a low P/E ratio.
How Does Harworth Group's P/E Ratio Compare To Its Peers?
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 Harworth Group has a P/E ratio that is fairly close for the average for the real estate industry, which is 12.6.
Harworth Group's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Harworth Group actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
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. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.