This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at German High Street Properties A/S’s (CPH:GERHSP) P/E ratio and reflect on what it tells us about the company’s share price. German High Street Properties has a price to earnings ratio of 35.26, based on the last twelve months. In other words, at today’s prices, investors are paying DKK35.26 for every DKK1 in prior year profit.
View our latest analysis for German High Street Properties
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for German High Street Properties:
P/E of 35.26 = €19.267 ÷ €0.546 (Based on the trailing twelve months to September 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely EUR and the calculation results may not be precise due to rounding.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.
Does German High Street Properties Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that German High Street Properties has a higher P/E than the average (12.4) P/E for companies in the real estate industry.
CPSE:GERHSP Price Estimation Relative to Market, March 4th 2020
That means that the market expects German High Street Properties will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
German High Street Properties saw earnings per share improve by -6.7% last year. Unfortunately, earnings per share are down 5.8% a year, over 5 years.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won’t reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
So What Does German High Street Properties’s Balance Sheet Tell Us?
German High Street Properties’s net debt is 75% of its market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Bottom Line On German High Street Properties’s P/E Ratio
German High Street Properties’s P/E is 35.3 which is above average (15.1) in its market. With relatively high debt, and reasonably modest earnings per share growth over twelve months, it’s safe to say the market believes the company will improve its growth in the future.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don’t have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than German High Street Properties. 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).
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.
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