Is Keskisuomalainen Oyj's (HEL:KSLAV) P/E Ratio Really That Good?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Keskisuomalainen Oyj's (HEL:KSLAV), to help you decide if the stock is worth further research. Keskisuomalainen Oyj has a P/E ratio of 10.14, based on the last twelve months. That corresponds to an earnings yield of approximately 9.9%.

Check out our latest analysis for Keskisuomalainen Oyj

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Keskisuomalainen Oyj:

P/E of 10.14 = EUR12.50 ÷ EUR1.23 (Based on the trailing twelve months to December 2019.)

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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Keskisuomalainen Oyj Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Keskisuomalainen Oyj has a lower P/E than the average (25.0) in the media industry classification.

Keskisuomalainen Oyj's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.

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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Keskisuomalainen Oyj's 140% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 19% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 Keskisuomalainen Oyj's Debt Impact Its P/E Ratio?

Keskisuomalainen Oyj has net debt equal to 27% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Keskisuomalainen Oyj's P/E Ratio

Keskisuomalainen Oyj's P/E is 10.1 which is below average (21.4) in the FI market. The company hasn't stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

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. 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.

But note: Keskisuomalainen Oyj may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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. Thank you for reading.