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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use Maintel Holdings Plc’s (LON:MAI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Maintel Holdings’s P/E ratio is 31.01. In other words, at today’s prices, investors are paying £31.01 for every £1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Maintel Holdings:
P/E of 31.01 = £4.46 ÷ £0.14 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Maintel Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Maintel Holdings has a higher P/E than the average (18.8) P/E for companies in the commercial services industry.
Its relatively high P/E ratio indicates that Maintel Holdings shareholders think it will perform better than other companies in its industry classification.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Maintel Holdings increased earnings per share by a whopping 33% last year. In contrast, EPS has decreased by 10%, annually, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn’t take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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).
Maintel Holdings’s Balance Sheet
Net debt is 32% of Maintel Holdings’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.
The Verdict On Maintel Holdings’s P/E Ratio
Maintel Holdings trades on a P/E ratio of 31, which is above its market average of 16.3. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable.
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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Maintel Holdings. 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 email@example.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.