In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Carl Zeiss Meditec AG's (ETR:AFX) P/E ratio and reflect on what it tells us about the company's share price. Carl Zeiss Meditec has a P/E ratio of 60.33, based on the last twelve months. That corresponds to an earnings yield of approximately 1.7%.
See our latest analysis for Carl Zeiss Meditec
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 Carl Zeiss Meditec:
P/E of 60.33 = €103.30 ÷ €1.71 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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.
Does Carl Zeiss Meditec Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Carl Zeiss Meditec has a higher P/E than the average (33.9) P/E for companies in the medical equipment industry.
Its relatively high P/E ratio indicates that Carl Zeiss Meditec shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
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. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Carl Zeiss Meditec grew EPS by 23% in the last year. And it has bolstered its earnings per share by 11% per year over the last five years. So one might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.