Despite Its High P/E Ratio, Is A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung (FRA:AAA) Still Undervalued?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung's (FRA:AAA) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, A.A.A. Allgemeine Anlageverwaltung's P/E ratio is 51.35. That means that at current prices, buyers pay €51.35 for every €1 in trailing yearly profits.

Check out our latest analysis for A.A.A. Allgemeine Anlageverwaltung

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 A.A.A. Allgemeine Anlageverwaltung:

P/E of 51.35 = €2.5 ÷ €0.049 (Based on the year to June 2018.)

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 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

A.A.A. Allgemeine Anlageverwaltung's earnings per share fell by 55% in the last twelve months. But it has grown its earnings per share by 22% per year over the last five years.

How Does A.A.A. Allgemeine Anlageverwaltung'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 (10.2) for companies in the real estate industry is a lot lower than A.A.A. Allgemeine Anlageverwaltung's P/E.

A.A.A. Allgemeine Anlageverwaltung's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does A.A.A. Allgemeine Anlageverwaltung's Debt Impact Its P/E Ratio?

Net debt totals 98% of A.A.A. Allgemeine Anlageverwaltung's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On A.A.A. Allgemeine Anlageverwaltung's P/E Ratio

A.A.A. Allgemeine Anlageverwaltung trades on a P/E ratio of 51.4, which is multiples above the DE market average of 16.5. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than A.A.A. Allgemeine Anlageverwaltung. If you want a selection of possible winners, check out this freelist of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.