# Here’s What Vermilion Energy Inc.’s (TSE:VET) P/E Is Telling Us

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Vermilion Energy Inc.’s (TSE:VET), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Vermilion Energy has a P/E ratio of 14.84. In other words, at today’s prices, investors are paying CA\$14.84 for every CA\$1 in prior year profit.

### How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Vermilion Energy:

P/E of 14.84 = CA\$28.68 ÷ CA\$1.93 (Based on the trailing twelve months to March 2019.)

### Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each CA\$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.

### Does Vermilion Energy Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Vermilion Energy has a higher P/E than the average (13.4) P/E for companies in the oil and gas industry.

Vermilion Energy’s P/E tells us that market participants think the company will perform better than its industry peers, going forward.

### How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Vermilion Energy’s earnings made like a rocket, taking off 453% last year. Regrettably, the longer term performance is poor, with EPS down 12% per year over 5 years.

### A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. 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.

### How Does Vermilion Energy’s Debt Impact Its P/E Ratio?

Net debt is 42% of Vermilion Energy’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.

### The Bottom Line On Vermilion Energy’s P/E Ratio

Vermilion Energy’s P/E is 14.8 which is about average (15.1) in the CA market. Given it has reasonable debt levels, and grew earnings strongly last year, the P/E indicates the market has doubts this growth can be sustained.

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. 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 Vermilion Energy. 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 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. Thank you for reading.