This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Etn. Fr. Colruyt NV's (EBR:COLR) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Etn. Fr. Colruyt has a P/E ratio of 16.90. In other words, at today's prices, investors are paying €16.90 for every €1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Etn. Fr. Colruyt:
P/E of 16.90 = €46.93 ÷ €2.78 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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 Etn. Fr. Colruyt's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (19.2) for companies in the consumer retailing industry is higher than Etn. Fr. Colruyt's P/E.
This suggests that market participants think Etn. Fr. Colruyt will underperform other companies in its industry.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Etn. Fr. Colruyt increased earnings per share by 6.7% last year. And it has bolstered its earnings per share by 4.4% per year over the last five years. If the company can grow EPS strongly, the market may improve its opinion of it. I would further inform my view by checking insider buying and selling., among other things.
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. 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.
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).
Is Debt Impacting Etn. Fr. Colruyt's P/E?
Etn. Fr. Colruyt has net cash of €159m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Etn. Fr. Colruyt's P/E Ratio
Etn. Fr. Colruyt trades on a P/E ratio of 16.9, which is above its market average of 15.6. EPS was up modestly better over the last twelve months. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Etn. Fr. Colruyt. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.