This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how PULSION Medical Systems SE's (MUN:PUS) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, PULSION Medical Systems has a P/E ratio of 28.88. That is equivalent to an earnings yield of about 3.5%.
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 PULSION Medical Systems:
P/E of 28.88 = €21.60 ÷ €0.75 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings 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 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.
Does PULSION Medical Systems 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 PULSION Medical Systems has a lower P/E than the average (32.9) P/E for companies in the medical equipment industry.
PULSION Medical Systems's P/E tells us that market participants think it will not fare as well as its peers in the same industry.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
PULSION Medical Systems's earnings per share fell by 8.2% in the last twelve months. And EPS is down 4.0% a year, over the last 5 years. So you wouldn't expect a very high P/E. The company could impress by growing EPS, in the future. I would further inform my view by checking insider buying and selling., among other things.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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).
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.
PULSION Medical Systems's Balance Sheet
Since PULSION Medical Systems holds net cash of €760, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On PULSION Medical Systems's P/E Ratio
PULSION Medical Systems has a P/E of 28.9. That's higher than the average in its market, which is 19.3. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than PULSION Medical Systems. 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 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.
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