Here's How P/E Ratios Can Help Us Understand SSAB AB (publ) (STO:SSAB A)

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 SSAB AB (publ)'s (STO:SSAB A) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, SSAB has a P/E ratio of 7.9. That means that at current prices, buyers pay SEK7.9 for every SEK1 in trailing yearly profits.

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See our latest analysis for SSAB

How Do You Calculate SSAB's P/E Ratio?

The formula for P/E is:

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

Or for SSAB:

P/E of 7.9 = SEK31.94 ÷ SEK4.04 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each SEK1 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.'

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. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

SSAB's earnings made like a rocket, taking off 69% last year.

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

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (10.2) for companies in the metals and mining industry is higher than SSAB's P/E.

Its relatively low P/E ratio indicates that SSAB shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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

Don't forget that the P/E ratio considers market capitalization. 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 SSAB's P/E?

SSAB's net debt equates to 37% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On SSAB's P/E Ratio

SSAB trades on a P/E ratio of 7.9, which is below the SE market average of 16.7. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 SSAB. 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.