This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Vogiatzoglou Systems SA’s (ATH:VOSYS) P/E ratio to inform your assessment of the investment opportunity. Vogiatzoglou Systems has a price to earnings ratio of 8.63, based on the last twelve months. That means that at current prices, buyers pay €8.63 for every €1 in trailing yearly profits.
See our latest analysis for Vogiatzoglou Systems
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Vogiatzoglou Systems:
P/E of 8.63 = €2.1 ÷ €0.24 (Based on the year 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Vogiatzoglou Systems increased earnings per share by 4.8% last year. And its annual EPS growth rate over 5 years is 68%.
How Does Vogiatzoglou Systems’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 (14) for companies in the trade distributors industry is higher than Vogiatzoglou Systems’s P/E.
Vogiatzoglou Systems’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or 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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).
Vogiatzoglou Systems’s Balance Sheet
Vogiatzoglou Systems has net debt worth just 7.7% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Bottom Line On Vogiatzoglou Systems’s P/E Ratio
Vogiatzoglou Systems’s P/E is 8.6 which is below average (11.7) in the GR market. The company hasn’t stretched its balance sheet, and earnings are improving. If you believe growth will continue – or even increase – then the low P/E may signify opportunity.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Vogiatzoglou Systems 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).
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.