The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Münchener Tierpark Hellabrunn AG's (MUN:MTP) P/E ratio and reflect on what it tells us about the company's share price. Münchener Tierpark Hellabrunn has a price to earnings ratio of 39.08, based on the last twelve months. That is equivalent to an earnings yield of about 2.6%.
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Münchener Tierpark Hellabrunn:
P/E of 39.08 = €300 ÷ €7.68 (Based on the trailing twelve months to December 2017.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Münchener Tierpark Hellabrunn increased earnings per share by a whopping 77% last year. And it has bolstered its earnings per share by 23% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 17%, annually, over 3 years.
How Does Münchener Tierpark Hellabrunn's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (15.3) for companies in the hospitality industry is lower than Münchener Tierpark Hellabrunn's P/E.
MUN:MTP PE PEG Gauge October 31st 18
Its relatively high P/E ratio indicates that Münchener Tierpark Hellabrunn shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Münchener Tierpark Hellabrunn's Balance Sheet
Since Münchener Tierpark Hellabrunn holds net cash of €1m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Münchener Tierpark Hellabrunn's P/E Ratio
Münchener Tierpark Hellabrunn's P/E is 39.1 which is above average (17.4) in the DE market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
