Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Kulmbacher Brauerei Aktien-Gesellschaft’s (MUN:KUL) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Kulmbacher Brauerei Aktien-Gesellschaft’s P/E ratio is 25.36. In other words, at today’s prices, investors are paying €25.36 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 = Share Price ÷ Earnings per Share (EPS)
Or for Kulmbacher Brauerei Aktien-Gesellschaft:
P/E of 25.36 = €70 ÷ €2.76 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Kulmbacher Brauerei Aktien-Gesellschaft increased earnings per share by a whopping 26% last year. And its annual EPS growth rate over 5 years is 25%. So we’d generally expect it to have a relatively high P/E ratio.
Does Kulmbacher Brauerei Aktien-Gesellschaft 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 Kulmbacher Brauerei Aktien-Gesellschaft has a P/E ratio that is roughly in line with the beverage industry average (23.8).
Its P/E ratio suggests that Kulmbacher Brauerei Aktien-Gesellschaft shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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 Kulmbacher Brauerei Aktien-Gesellschaft’s Balance Sheet Tell Us?
With net cash of €26m, Kulmbacher Brauerei Aktien-Gesellschaft has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Kulmbacher Brauerei Aktien-Gesellschaft’s P/E Ratio
Kulmbacher Brauerei Aktien-Gesellschaft has a P/E of 25.4. That’s higher than the average in the DE market, which is 19.7. 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. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Kulmbacher Brauerei Aktien-Gesellschaft. 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 email@example.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.