Do You Like United Internet AG (ETR:UTDI) At This P/E Ratio?

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at United Internet AG's (ETR:UTDI) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, United Internet has a P/E ratio of 15.19. In other words, at today's prices, investors are paying €15.19 for every €1 in prior year profit.

Check out our latest analysis for United Internet

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for United Internet:

P/E of 15.19 = EUR30.50 ÷ EUR2.01 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each EUR1 of company earnings. 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 Does United Internet's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (21.5) for companies in the telecom industry is higher than United Internet's P/E.

United Internet's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with United Internet, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

In the last year, United Internet grew EPS like Taylor Swift grew her fan base back in 2010; the 337% gain was both fast and well deserved. And earnings per share have improved by 40% annually, over the last three years. So we'd absolutely expect it to have a relatively high P/E ratio.

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. 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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does United Internet's Debt Impact Its P/E Ratio?

United Internet's net debt equates to 26% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Verdict On United Internet's P/E Ratio

United Internet has a P/E of 15.2. That's below the average in the DE market, which is 20.7. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: United Internet may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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. Thank you for reading.