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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 High Liner Foods Incorporated’s (TSE:HLF) P/E ratio to inform your assessment of the investment opportunity. High Liner Foods has a P/E ratio of 5.65, based on the last twelve months. That means that at current prices, buyers pay CA$5.65 for every CA$1 in trailing yearly profits.
View our latest analysis for High Liner Foods
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for High Liner Foods:
P/E of 5.65 = $5.36 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.95 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CA$1 the company has earned over the last year. 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
When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Notably, High Liner Foods grew EPS by a whopping 25% in the last year. In contrast, EPS has decreased by 1.8%, annually, over 5 years.
How Does High Liner Foods’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that High Liner Foods has a lower P/E than the average (14) P/E for companies in the food industry.
Its relatively low P/E ratio indicates that High Liner Foods shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with High Liner Foods, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.