Does Holders Technology plc's (LON:HDT) P/E Ratio Signal A Buying Opportunity?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Holders Technology plc's (LON:HDT) P/E ratio and reflect on what it tells us about the company's share price. Holders Technology has a P/E ratio of 11.16, based on the last twelve months. In other words, at today's prices, investors are paying £11.16 for every £1 in prior year profit.

See our latest analysis for Holders Technology

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Holders Technology:

P/E of 11.16 = £0.41 ÷ £0.04 (Based on the trailing twelve months to May 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each £1 of company earnings. 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.

Does Holders Technology Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Holders Technology has a lower P/E than the average (19.7) in the electronic industry classification.

Its relatively low P/E ratio indicates that Holders Technology shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Holders Technology, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Holders Technology's earnings per share fell by 19% in the last twelve months.

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

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Holders Technology's Debt Impact Its P/E Ratio?

With net cash of UK£674k, Holders Technology has a very strong balance sheet, which may be important for its business. Having said that, at 39% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Holders Technology's P/E Ratio

Holders Technology has a P/E of 11.2. That's below the average in the GB market, which is 16.4. The recent drop in earnings per share would make investors cautious, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Holders Technology. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.