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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use KRUK Spólka Akcyjna’s (WSE:KRU) P/E ratio to inform your assessment of the investment opportunity. KRUK Spólka Akcyjna has a price to earnings ratio of 9.71, based on the last twelve months. In other words, at today’s prices, investors are paying PLN9.71 for every PLN1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for KRUK Spólka Akcyjna:
P/E of 9.71 = PLN173.5 ÷ PLN17.88 (Based on the year to March 2019.)
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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
KRUK Spólka Akcyjna increased earnings per share by an impressive 24% over the last twelve months. And its annual EPS growth rate over 5 years is 21%. This could arguably justify a relatively high P/E ratio.
Does KRUK Spólka Akcyjna Have A Relatively High Or Low P/E For Its Industry?
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 (4.1) for companies in the consumer finance industry is lower than KRUK Spólka Akcyjna’s P/E.
That means that the market expects KRUK Spólka Akcyjna will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting KRUK Spólka Akcyjna’s P/E?
Net debt totals 73% of KRUK Spólka Akcyjna’s 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 KRUK Spólka Akcyjna’s P/E Ratio
KRUK Spólka Akcyjna has a P/E of 9.7. That’s below the average in the PL market, which is 10.9. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
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 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 KRUK Spólka Akcyjna. 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 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.