This acupuncture points on dogs chartarticle is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Ovzon AB (publ)'s (

STO:OVZON

) P/E ratio and reflect on what it tells us about the company's share price.

What is Ovzon's P/E ratio?

Well, based on the last twelve months it is 35.94. That corresponds to an earnings yield of approximately 2.8%.

Check out our latest analysis for Ovzon

How Do I Calculate A Price To Earnings Ratio?

The

formula for price to earnings

is:

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

Or for Ovzon:

P/E of 35.94 = SEK45.950 ÷ SEK1.279 (Based on the trailing twelve months to March 2020.)

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

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. That is not a good or a bad thing

per se

, but a high P/E does imply buyers are optimistic about the future.

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

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (24.9) for companies in the telecom industry is lower than Ovzon's P/E.

OM:OVZON Price Estimation Relative to Market May 4th 2020

That means that the market expects Ovzon will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

In the last year, Ovzon grew EPS like Taylor Swift grew her fan base back in 2010; the 62% gain was both fast and well deserved. Unfortunately, earnings per share are down 24% a year, over 5 years.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.

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.

Story continues

Ovzon's Balance Sheet

Ovzon has net cash of kr265m. This is fairly high at 14% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Ovzon's P/E Ratio

Ovzon's P/E is 35.9 which is above average (16.4) in its market. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this

free

visual report on analyst forecasts

could hold the key to an excellent investment decision.

You might be able to find a better buy than Ovzon. 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

[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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