Should You Be Tempted To Sell Terna – Rete Elettrica Nazionale Società per Azioni (BIT:TRN) Because Of Its P/E Ratio?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Terna – Rete Elettrica Nazionale Società per Azioni’s (BIT:TRN) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Terna – Rete Elettrica Nazionale Società per Azioni’s P/E ratio is 16.15. In other words, at today’s prices, investors are paying €16.15 for every €1 in prior year profit.

View our latest analysis for Terna – Rete Elettrica Nazionale Società per Azioni

How Do I Calculate Terna – Rete Elettrica Nazionale Società per Azioni’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for Terna – Rete Elettrica Nazionale Società per Azioni:

P/E of 16.15 = €5.6 ÷ €0.35 (Based on the trailing twelve months to December 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. When earnings grow, the ‘E’ increases, over time. 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.

Terna – Rete Elettrica Nazionale Società per Azioni increased earnings per share by 5.7% last year. And earnings per share have improved by 7.4% annually, over the last five years.

How Does Terna – Rete Elettrica Nazionale Società per Azioni’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (12.3) for companies in the electric utilities industry is lower than Terna – Rete Elettrica Nazionale Società per Azioni’s P/E.

BIT:TRN Price Estimation Relative to Market, April 3rd 2019
BIT:TRN Price Estimation Relative to Market, April 3rd 2019

That means that the market expects Terna – Rete Elettrica Nazionale Società per Azioni will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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).

Terna – Rete Elettrica Nazionale Società per Azioni’s Balance Sheet

Terna – Rete Elettrica Nazionale Società per Azioni has net debt worth 52% of its market capitalization. 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 Terna – Rete Elettrica Nazionale Società per Azioni’s P/E Ratio

Terna – Rete Elettrica Nazionale Società per Azioni trades on a P/E ratio of 16.2, which is fairly close to the IT market average of 16. It has significant debt, though the market seems to take confidence from recent earnings growth.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

You might be able to find a better buy than Terna – Rete Elettrica Nazionale Società per Azioni. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.