Here's How P/E Ratios Can Help Us Understand Gr. Sarantis S.A. (ATH:SAR)

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Gr. Sarantis S.A.'s (ATH:SAR), to help you decide if the stock is worth further research. Gr. Sarantis has a price to earnings ratio of 15.31, based on the last twelve months. That corresponds to an earnings yield of approximately 6.5%.

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How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Gr. Sarantis:

P/E of 15.31 = €7.35 ÷ €0.48 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company 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

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's great to see that Gr. Sarantis grew EPS by 15% in the last year. And it has bolstered its earnings per share by 17% per year over the last five years. So one might expect an above average P/E ratio.

How Does Gr. Sarantis's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Gr. Sarantis has a lower P/E than the average (16.7) in the personal products industry classification.

Gr. Sarantis's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

Gr. Sarantis's Balance Sheet

Net debt totals just 2.3% of Gr. Sarantis's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On Gr. Sarantis's P/E Ratio

Gr. Sarantis trades on a P/E ratio of 15.3, which is fairly close to the GR market average of 15.3. With only modest debt levels, and strong earnings growth, the market seems to doubt that the growth can be maintained. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research.

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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

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.