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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use u-blox Holding AG’s (VTX:UBXN) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, u-blox Holding has a P/E ratio of 13.37. That corresponds to an earnings yield of approximately 7.5%.
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 u-blox Holding:
P/E of 13.37 = CHF74.6 ÷ CHF5.58 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 of company 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 u-blox Holding’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (24) for companies in the semiconductor industry is higher than u-blox Holding’s P/E.
Its relatively low P/E ratio indicates that u-blox Holding shareholders think it will struggle to do as well as other companies in its industry classification.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
u-blox Holding saw earnings per share decrease by 25% last year. But it has grown its earnings per share by 7.7% per year over the last five years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
So What Does u-blox Holding’s Balance Sheet Tell Us?
The extra options and safety that comes with u-blox Holding’s CHF19m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On u-blox Holding’s P/E Ratio
u-blox Holding has a P/E of 13.4. That’s below the average in the CH market, which is 18.1. The recent drop in earnings per share would make investors cautious, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.
Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than u-blox Holding. 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).
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.