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Read This Before You Buy Nordic Waterproofing Holding A/S (STO:NWG) Because Of Its P/E Ratio

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Nordic Waterproofing Holding A/S's (STO:NWG) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Nordic Waterproofing Holding has a P/E ratio of 13.68. In other words, at today's prices, investors are paying SEK13.68 for every SEK1 in prior year profit.

See our latest analysis for Nordic Waterproofing Holding

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Nordic Waterproofing Holding:

P/E of 13.68 = SEK112.40 ÷ SEK8.22 (Based on the trailing twelve months to December 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Nordic Waterproofing Holding 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 Nordic Waterproofing Holding has a lower P/E than the average (22.2) in the building industry classification.

OM:NWG Price Estimation Relative to Market, February 18th 2020
OM:NWG Price Estimation Relative to Market, February 18th 2020

This suggests that market participants think Nordic Waterproofing Holding will underperform other companies in its industry. Since the market seems unimpressed with Nordic Waterproofing Holding, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. When earnings grow, the 'E' increases, over time. 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.

It's nice to see that Nordic Waterproofing Holding grew EPS by a stonking 30% in the last year. And its annual EPS growth rate over 5 years is 4.1%. So we'd generally expect it to have a relatively high P/E ratio.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 Nordic Waterproofing Holding's P/E?

Nordic Waterproofing Holding has net debt worth 23% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On Nordic Waterproofing Holding's P/E Ratio

Nordic Waterproofing Holding trades on a P/E ratio of 13.7, which is below the SE market average of 20.1. 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. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.

But note: Nordic Waterproofing Holding 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.