What Does Terna - Rete Elettrica Nazionale Società per Azioni's (BIT:TRN) P/E Ratio Tell You?

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 Terna - Rete Elettrica Nazionale Società per Azioni's (BIT:TRN) P/E ratio to inform your assessment of the investment opportunity. Terna - Rete Elettrica Nazionale Società per Azioni has a price to earnings ratio of 15.81, based on the last twelve months. That means that at current prices, buyers pay €15.81 for every €1 in trailing yearly profits.

Check out 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 = Share Price ÷ Earnings per Share (EPS)

Or for Terna - Rete Elettrica Nazionale Società per Azioni:

P/E of 15.81 = €5.61 ÷ €0.35 (Based on the trailing twelve months to September 2019.)

Is A High P/E 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.

Does Terna - Rete Elettrica Nazionale Società per Azioni Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Terna - Rete Elettrica Nazionale Società per Azioni has a higher P/E than the average company (13.2) in the electric utilities industry.

That means that the market expects Terna - Rete Elettrica Nazionale Società per Azioni will outperform other companies in its industry.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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.

Terna - Rete Elettrica Nazionale Società per Azioni increased earnings per share by 2.6% last year. If the company can grow EPS strongly, the market may improve its opinion of it. I would further inform my view by checking insider buying and selling., among other things.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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 Terna - Rete Elettrica Nazionale Società per Azioni's Debt Impact Its P/E Ratio?

Terna - Rete Elettrica Nazionale Società per Azioni's net debt is 72% of its market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with 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 15.8, which is below the IT market average of 18.3. While the recent EPS growth is a positive, the significant amount of debt on the balance sheet may be contributing to pessimistic market expectations.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.

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.

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. Thank you for reading.