This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Antevenio, S.A.'s (EPA:ALANT) P/E ratio and reflect on what it tells us about the company's share price. Antevenio has a P/E ratio of 10.52, based on the last twelve months. That is equivalent to an earnings yield of about 9.5%.
See our latest analysis for Antevenio
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 Antevenio:
P/E of 10.52 = €6.08 ÷ €0.58 (Based on the trailing twelve months to December 2018.)
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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Antevenio Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Antevenio has a lower P/E than the average (13.7) P/E for companies in the media industry.
This suggests that market participants think Antevenio will underperform other companies in its industry. Since the market seems unimpressed with Antevenio, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Antevenio had pretty flat EPS growth in the last year. But it has grown its earnings per share by 22% per year over the last three 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. That means it doesn't take debt or cash into account. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.