In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Gestamp Automoción, S.A.'s (BME:GEST) P/E ratio and reflect on what it tells us about the company's share price. Gestamp Automoción has a price to earnings ratio of 10.26, based on the last twelve months. That is equivalent to an earnings yield of about 9.7%.
See our latest analysis for Gestamp Automoción
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Gestamp Automoción:
P/E of 10.26 = €3.97 ÷ €0.39 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Gestamp Automoción Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below Gestamp Automoción has a P/E ratio that is fairly close for the average for the auto components industry, which is 10.3.
Its P/E ratio suggests that Gestamp Automoción shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Gestamp Automoción saw earnings per share decrease by 14% last year. But EPS is up 8.4% over the last 3 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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).