Here's How P/E Ratios Can Help Us Understand Fresenius SE & Co. KGaA (FRA:FRE)

By
Simply Wall St
Published
August 27, 2019
DB:FRE

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Fresenius SE & Co. KGaA's (FRA:FRE) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Fresenius SE KGaA has a P/E ratio of 13.14. That corresponds to an earnings yield of approximately 7.6%.

See our latest analysis for Fresenius SE KGaA

How Do I Calculate Fresenius SE KGaA's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Fresenius SE KGaA:

P/E of 13.14 = €43.9 ÷ €3.34 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each €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 Fresenius SE KGaA Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Fresenius SE KGaA has a lower P/E than the average (25.3) in the healthcare industry classification.

DB:FRE Price Estimation Relative to Market, August 27th 2019
DB:FRE Price Estimation Relative to Market, August 27th 2019

Its relatively low P/E ratio indicates that Fresenius SE KGaA 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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Fresenius SE KGaA shrunk earnings per share by 7.2% last year. But over the longer term (5 years) earnings per share have increased by 11%.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 Fresenius SE KGaA's Debt Impact Its P/E Ratio?

Fresenius SE KGaA has net debt worth 78% of its market capitalization. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Bottom Line On Fresenius SE KGaA's P/E Ratio

Fresenius SE KGaA's P/E is 13.1 which is below average (18.4) in the DE market. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.

Investors have an opportunity when market expectations about a stock are wrong. 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.

Of course you might be able to find a better stock than Fresenius SE KGaA. 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.

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