Should You Be Tempted To Sell EnBW Energie Baden-Württemberg AG (FRA:EBK) Because Of Its P/E Ratio?

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at EnBW Energie Baden-Württemberg AG’s (FRA:EBK) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, EnBW Energie Baden-Württemberg’s P/E ratio is 18.65. That corresponds to an earnings yield of approximately 5.4%.

See our latest analysis for EnBW Energie Baden-Württemberg

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 EnBW Energie Baden-Württemberg:

P/E of 18.65 = €32.4 ÷ €1.74 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

EnBW Energie Baden-Württemberg saw earnings per share decrease by 74% last year.

How Does EnBW Energie Baden-Württemberg’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that EnBW Energie Baden-Württemberg has a higher P/E than the average (12.2) P/E for companies in the electric utilities industry.

DB:EBK Price Estimation Relative to Market, June 9th 2019
DB:EBK Price Estimation Relative to Market, June 9th 2019

That means that the market expects EnBW Energie Baden-Württemberg will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 EnBW Energie Baden-Württemberg’s Debt Impact Its P/E Ratio?

Net debt is 48% of EnBW Energie Baden-Württemberg’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.

The Bottom Line On EnBW Energie Baden-Württemberg’s P/E Ratio

EnBW Energie Baden-Württemberg’s P/E is 18.7 which is about average (19.7) in the DE market. When you consider the lack of EPS growth last year (along with some debt), it seems the market is optimistic about the future for the business.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: EnBW Energie Baden-Württemberg 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).

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.