The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Pfleiderer Group Spólka Akcyjna’s (WSE:PFL) P/E ratio could help you assess the value on offer. Pfleiderer Group Spólka Akcyjna has a P/E ratio of 33.68, based on the last twelve months. In other words, at today’s prices, investors are paying PLN33.68 for every PLN1 in prior year profit.
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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 (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Pfleiderer Group Spólka Akcyjna:
P/E of 33.68 = €7.75 (Note: this is the share price in the reporting currency, namely, EUR ) ÷ €0.23 (Based on the trailing twelve months to September 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 isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Pfleiderer Group Spólka Akcyjna shrunk earnings per share by 14% over the last year. And EPS is down 12% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
How Does Pfleiderer Group Spólka Akcyjna’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (13.8) for companies in the forestry industry is lower than Pfleiderer Group Spólka Akcyjna’s P/E.
That means that the market expects Pfleiderer Group Spólka Akcyjna will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Pfleiderer Group Spólka Akcyjna’s Balance Sheet
Pfleiderer Group Spólka Akcyjna has net debt worth a very significant 103% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On Pfleiderer Group Spólka Akcyjna’s P/E Ratio
Pfleiderer Group Spólka Akcyjna’s P/E is 33.7 which is way above average (10.5) in the PL market. With relatively high debt, and no earnings per share growth over twelve months, it’s safe to say the market believes the company will improve its earnings growth in the future.
Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold they 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.