Is CompuGroup Medical Societas Europaea’s (FRA:COP) High P/E Ratio A Problem For Investors?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to CompuGroup Medical Societas Europaea’s (FRA:COP), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, CompuGroup Medical Societas Europaea has a P/E ratio of 29.63. That corresponds to an earnings yield of approximately 3.4%.

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View our latest analysis for CompuGroup Medical Societas Europaea

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for CompuGroup Medical Societas Europaea:

P/E of 29.63 = €59.9 ÷ €2.02 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, CompuGroup Medical Societas Europaea grew EPS like Taylor Swift grew her fan base back in 2010; the 181% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 41% per year. So I’d be surprised if the P/E ratio was not above average.

Does CompuGroup Medical Societas Europaea Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that CompuGroup Medical Societas Europaea has a higher P/E than the average (25.3) P/E for companies in the healthcare services industry.

DB:COP Price Estimation Relative to Market, May 24th 2019
DB:COP Price Estimation Relative to Market, May 24th 2019

That means that the market expects CompuGroup Medical Societas Europaea will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 CompuGroup Medical Societas Europaea’s Balance Sheet Tell Us?

Net debt totals 10% of CompuGroup Medical Societas Europaea’s market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On CompuGroup Medical Societas Europaea’s P/E Ratio

CompuGroup Medical Societas Europaea’s P/E is 29.6 which is above average (20.2) in the DE market. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So to be frank we are not surprised it has a high P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.