Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Aquila Services Group plc's (LON:AQSG) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Aquila Services Group has a P/E ratio of 23.19. That corresponds to an earnings yield of approximately 4.3%.
See our latest analysis for Aquila Services Group
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Aquila Services Group:
P/E of 23.19 = £0.33 ÷ £0.01 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Aquila Services Group's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below Aquila Services Group has a P/E ratio that is fairly close for the average for the professional services industry, which is 23.2.
Its P/E ratio suggests that Aquila Services Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Aquila Services Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Aquila Services Group grew EPS by 13% in the last year. And earnings per share have improved by 35% annually, over the last three years. So one might expect an above average P/E ratio. In contrast, EPS has decreased by 11%, annually, over 5 years.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).