Theford f250 leveled on 37s goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how SkiStar AB (publ)'s (

STO:SKIS B

) P/E ratio could help you assess the value on offer.

What is SkiStar's P/E ratio?

Well, based on the last twelve months it is 21.18. That corresponds to an earnings yield of approximately 4.7%.

View our latest analysis for SkiStar

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 SkiStar:

P/E of 21.18 = SEK98.600 ÷ SEK4.655 (Based on the trailing twelve months to November 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay

a higher price

for each SEK1 the company has earned over the last year. 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 Does SkiStar's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (13.9) for companies in the hospitality industry is lower than SkiStar's P/E.

OM:SKIS B Price Estimation Relative to Market, March 4th 2020

Its relatively high P/E ratio indicates that SkiStar shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as

whether company directors have been buying shares

.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

SkiStar shrunk earnings per share by 31% over the last year. But over the longer term (5 years) earnings per share have increased by 16%.

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. Thus, the metric does not reflect cash or debt held by the company. 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).

Story continues

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

SkiStar's Balance Sheet

Net debt totals 21% of SkiStar's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On SkiStar's P/E Ratio

SkiStar's P/E is 21.2 which is above average (18.5) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this

free

report on the analyst consensus forecasts

could help you make a

master move

on this stock.

Of course

you might be able to find a better stock than SkiStar

. So you may wish to see this

free

collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at

[email protected]

. 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.

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