Despite Its High P/E Ratio, Is Aspocomp Group Oyj (HEL:ACG1V) Still Undervalued?

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Aspocomp Group Oyj's (HEL:ACG1V) P/E ratio and reflect on what it tells us about the company's share price. What is Aspocomp Group Oyj's P/E ratio? Well, based on the last twelve months it is 9.29. In other words, at today's prices, investors are paying €9.29 for every €1 in prior year profit.

Check out our latest analysis for Aspocomp Group Oyj

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Aspocomp Group Oyj:

P/E of 9.29 = €4.52 ÷ €0.49 (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. 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 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Aspocomp Group Oyj's earnings made like a rocket, taking off 151% last year.

How Does Aspocomp Group Oyj's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below Aspocomp Group Oyj has a P/E ratio that is fairly close for the average for the electronic industry, which is 9.5.

HLSE:ACG1V Price Estimation Relative to Market, April 16th 2019

Aspocomp Group Oyj's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Aspocomp Group Oyj actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

Is Debt Impacting Aspocomp Group Oyj's P/E?

Net debt totals just 9.5% of Aspocomp Group Oyj's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Aspocomp Group Oyj's P/E Ratio

Aspocomp Group Oyj trades on a P/E ratio of 9.3, which is below the FI market average of 19.8. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

You might be able to find a better buy than Aspocomp Group Oyj. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.