In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Dassault Aviation SA's (EPA:AM) P/E ratio to inform your assessment of the investment opportunity. Dassault Aviation has a P/E ratio of 15.35, based on the last twelve months. In other words, at today's prices, investors are paying €15.35 for every €1 in prior year profit.
View our latest analysis for Dassault Aviation
How Do You Calculate Dassault Aviation's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Dassault Aviation:
P/E of 15.35 = €1296.00 ÷ €84.42 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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 Dassault Aviation 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. If you look at the image below, you can see Dassault Aviation has a lower P/E than the average (24.8) in the aerospace & defense industry classification.
This suggests that market participants think Dassault Aviation will underperform other companies in its industry. Since the market seems unimpressed with Dassault Aviation, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Dassault Aviation's earnings made like a rocket, taking off 76% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 13%.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.