The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how 1000mercis's (EPA:ALMIL) P/E ratio could help you assess the value on offer. 1000mercis has a P/E ratio of 13.55, based on the last twelve months. That is equivalent to an earnings yield of about 7.4%.
Check out our latest analysis for 1000mercis
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 1000mercis:
P/E of 13.55 = €21.50 ÷ €1.59 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does 1000mercis's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that 1000mercis has a P/E ratio that is roughly in line with the media industry average (13.7).
That indicates that the market expects 1000mercis will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
1000mercis's earnings per share fell by 14% in the last twelve months. And EPS is down 5.5% a year, over the last 5 years. This could justify a pessimistic P/E.
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. 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.
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.
So What Does 1000mercis's Balance Sheet Tell Us?
Net debt totals just 1.0% of 1000mercis's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.