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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Personal Group Holdings Plc's (LON:PGH) P/E ratio to inform your assessment of the investment opportunity. Personal Group Holdings has a P/E ratio of 17.36, based on the last twelve months. That is equivalent to an earnings yield of about 5.8%.
See our latest analysis for Personal Group Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Personal Group Holdings:
P/E of 17.36 = £4.73 ÷ £0.27 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Personal Group Holdings saw earnings per share improve by -4.4% last year. And it has bolstered its earnings per share by 31% per year over the last five years. In contrast, EPS has decreased by 14%, annually, over 3 years.
Does Personal Group Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (16.5) for companies in the insurance industry is roughly the same as Personal Group Holdings's P/E.
Personal Group Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.