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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at DPA Group N.V.'s (AMS:DPA) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, DPA Group's P/E ratio is 8.45. That is equivalent to an earnings yield of about 12%.
View our latest analysis for DPA Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for DPA Group:
P/E of 8.45 = €1.5 ÷ €0.18 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
DPA Group increased earnings per share by a whopping 321% last year. And it has bolstered its earnings per share by 8.5% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high. Unfortunately, earnings per share are down 1.5% a year, over 3 years.
How Does DPA Group's P/E Ratio Compare To Its Peers?
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 DPA Group has a lower P/E than the average (14.5) in the professional services industry classification.
This suggests that market participants think DPA Group will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).