# Here’s What Eltrak SA’s (ATH:ELTRK) P/E Ratio Is Telling Us

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Eltrak SA’s (ATH:ELTRK) P/E ratio could help you assess the value on offer. Eltrak has a price to earnings ratio of 6.17, based on the last twelve months. That is equivalent to an earnings yield of about 16%.

### How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Eltrak:

P/E of 6.17 = €2 ÷ €0.32 (Based on the trailing twelve months to June 2018.)

### Is A High Price-to-Earnings 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

Earnings growth rates have a big influence on P/E ratios. 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.

Eltrak saw earnings per share improve by -4.0% last year. And its annual EPS growth rate over 5 years is 25%.

### How Does Eltrak’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (13.6) for companies in the trade distributors industry is higher than Eltrak’s P/E.

This suggests that market participants think Eltrak will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, 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 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 Eltrak’s Debt Impact Its P/E Ratio?

Eltrak’s net debt is 66% of its 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 Eltrak’s P/E Ratio

Eltrak’s P/E is 6.2 which is below average (11.7) in the GR market. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.

Investors have an opportunity when market expectations about a stock are wrong. 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 could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

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.