Should You Be Tempted To Sell Internationella Engelska Skolan i Sverige Holdings II AB (publ) (STO:ENG) Because Of Its P/E Ratio?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Internationella Engelska Skolan i Sverige Holdings II AB (publ)'s (STO:ENG) P/E ratio could help you assess the value on offer. What is Internationella Engelska Skolan i Sverige Holdings II's P/E ratio? Well, based on the last twelve months it is 19.21. That is equivalent to an earnings yield of about 5.2%.

See our latest analysis for Internationella Engelska Skolan i Sverige Holdings II

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Internationella Engelska Skolan i Sverige Holdings II:

P/E of 19.21 = SEK57.4 ÷ SEK2.99 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each SEK1 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 Does Internationella Engelska Skolan i Sverige Holdings II's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below Internationella Engelska Skolan i Sverige Holdings II has a P/E ratio that is fairly close for the average for the consumer services industry, which is 19.2.

Its P/E ratio suggests that Internationella Engelska Skolan i Sverige Holdings II shareholders think that in the future it will perform about the same as other companies in its industry classification.

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.

Internationella Engelska Skolan i Sverige Holdings II saw earnings per share decrease by 14% last year. But EPS is up 17% over the last 5 years. And EPS is down 2.0% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

Internationella Engelska Skolan i Sverige Holdings II's Balance Sheet

Internationella Engelska Skolan i Sverige Holdings II has net debt worth just 0.4% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On Internationella Engelska Skolan i Sverige Holdings II's P/E Ratio

Internationella Engelska Skolan i Sverige Holdings II has a P/E of 19.2. That's higher than the average in its market, which is 15.9. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Internationella Engelska Skolan i Sverige Holdings II. 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 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. Thank you for reading.