The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Adecco Group AG's (VTX:ADEN) P/E ratio and reflect on what it tells us about the company's share price. What is Adecco Group's P/E ratio? Well, based on the last twelve months it is 25.56. That means that at current prices, buyers pay CHF25.56 for every CHF1 in trailing yearly profits.
Check out our latest analysis for Adecco Group
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Adecco Group:
P/E of 25.56 = EUR56.33 (Note: this is the share price in the reporting currency, namely, EUR ) ÷ EUR2.20 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
Does Adecco Group 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. As you can see below, Adecco Group has a higher P/E than the average company (20.9) in the professional services industry.
That means that the market expects Adecco Group will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Adecco Group saw earnings per share decrease by 58% last year. And over the longer term (5 years) earnings per share have decreased 9.0% annually. This could justify a pessimistic P/E.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).