Is Pkp Cargo S.A.'s (WSE:PKP) P/E Ratio Really That Good?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Pkp Cargo S.A.'s (WSE:PKP) P/E ratio could help you assess the value on offer. What is Pkp Cargo's P/E ratio? Well, based on the last twelve months it is 7.46. That is equivalent to an earnings yield of about 13.4%.

Check out our latest analysis for Pkp Cargo

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Pkp Cargo:

P/E of 7.46 = PLN23.70 ÷ PLN3.18 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Does Pkp Cargo Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (10.7) for companies in the transportation industry is higher than Pkp Cargo's P/E.

This suggests that market participants think Pkp Cargo will underperform other companies in its industry.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

Pkp Cargo shrunk earnings per share by 6.4% last year. But over the longer term (5 years) earnings per share have increased by 2.3%. If the company can grow EPS strongly, the market may improve its opinion of it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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 Pkp Cargo's P/E?

Pkp Cargo has net debt worth 82% of its market capitalization. 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 Pkp Cargo's P/E Ratio

Pkp Cargo's P/E is 7.5 which is below average (10.4) in the PL market. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Pkp Cargo may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.