This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at CSY Spólka Akcyjna’s (WSE:CSY) P/E ratio and reflect on what it tells us about the company’s share price. CSY Spólka Akcyjna has a P/E ratio of 20.47, based on the last twelve months. That means that at current prices, buyers pay PLN20.47 for every PLN1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for CSY Spólka Akcyjna:
P/E of 20.47 = PLN6.4 ÷ PLN0.31 (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 PLN1 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, CSY Spólka Akcyjna grew EPS by a whopping 89% in the last year. And its annual EPS growth rate over 5 years is 27%. With that performance, I would expect it to have an above average P/E ratio.
How Does CSY Spólka Akcyjna’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, CSY Spólka Akcyjna has a higher P/E than the average company (8.8) in the machinery industry.
That means that the market expects CSY Spólka Akcyjna will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
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.
Is Debt Impacting CSY Spólka Akcyjna’s P/E?
Since CSY Spólka Akcyjna holds net cash of zł199k, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On CSY Spólka Akcyjna’s P/E Ratio
CSY Spólka Akcyjna’s P/E is 20.5 which is above average (10.9) in the PL market. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it does not seem strange that the P/E is above average.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than CSY Spólka Akcyjna. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org. 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.