In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at European Eltech Public Joint Stock Company's (MCX:EELT) P/E ratio and reflect on what it tells us about the company's share price. What is European Eltech's P/E ratio? Well, based on the last twelve months it is 16.77. That means that at current prices, buyers pay RUB16.77 for every RUB1 in trailing yearly profits.
See our latest analysis for European Eltech
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for European Eltech:
P/E of 16.77 = RUB9.56 ÷ RUB0.57 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each RUB1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does European Eltech Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (12.1) for companies in the construction industry is lower than European Eltech's P/E.
European Eltech's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
European Eltech's earnings per share grew by -7.8% in the last twelve months. And earnings per share have improved by 20% annually, over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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).