Does Elisa Oyj (HEL:ELISA) Have A Good P/E Ratio?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Elisa Oyj's (HEL:ELISA) P/E ratio and reflect on what it tells us about the company's share price. Elisa Oyj has a P/E ratio of 21.69, based on the last twelve months. In other words, at today's prices, investors are paying €21.69 for every €1 in prior year profit.

View our latest analysis for Elisa Oyj

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 Elisa Oyj:

P/E of 21.69 = €42.1 ÷ €1.94 (Based on the trailing twelve months to March 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 €1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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.

Elisa Oyj saw earnings per share decrease by 9.6% last year. But over the longer term (5 years) earnings per share have increased by 8.0%.

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

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Elisa Oyj has a P/E ratio that is roughly in line with the telecom industry average (23).

Its P/E ratio suggests that Elisa Oyj shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

So What Does Elisa Oyj's Balance Sheet Tell Us?

Elisa Oyj has net debt worth 16% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On Elisa Oyj's P/E Ratio

Elisa Oyj has a P/E of 21.7. That's higher than the average in the FI market, which is 20.1. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Elisa 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.