The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use OPG Power Ventures Plc’s (LON:OPG) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, OPG Power Ventures’s P/E ratio is 10.17. That is equivalent to an earnings yield of about 9.8%.
See our latest analysis for OPG Power Ventures
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 OPG Power Ventures:
P/E of 10.17 = £0.25 ÷ £0.025 (Based on the trailing twelve months to September 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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
OPG Power Ventures’s earnings per share fell by 71% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 6.9%. And it has shrunk its earnings per share by 13% per year over the last three years. This growth rate might warrant a low P/E ratio. This might lead to low expectations.
How Does OPG Power Ventures’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see OPG Power Ventures has a lower P/E than the average (11.3) in the electric utilities industry classification.
Its relatively low P/E ratio indicates that OPG Power Ventures shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with OPG Power Ventures, 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does OPG Power Ventures’s Debt Impact Its P/E Ratio?
OPG Power Ventures has net debt worth 97% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On OPG Power Ventures’s P/E Ratio
OPG Power Ventures trades on a P/E ratio of 10.2, which is below the GB market average of 14.9. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.