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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Caspar Asset Management S.A.'s (WSE:CSR) P/E ratio to inform your assessment of the investment opportunity. Caspar Asset Management has a P/E ratio of 35.67, based on the last twelve months. That is equivalent to an earnings yield of about 2.8%.
Check out our latest analysis for Caspar Asset Management
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Caspar Asset Management:
P/E of 35.67 = PLN22 ÷ PLN0.62 (Based on the trailing twelve months to December 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Caspar Asset Management shrunk earnings per share by 50% over the last year. But it has grown its earnings per share by 12% per year over the last five years.
Does Caspar Asset Management Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (11.2) for companies in the capital markets industry is a lot lower than Caspar Asset Management's P/E.
That means that the market expects Caspar Asset Management will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.