This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Euromoney Institutional Investor PLC's (LON:ERM), to help you decide if the stock is worth further research. Based on the last twelve months, Euromoney Institutional Investor's P/E ratio is 71.67. That means that at current prices, buyers pay £71.67 for every £1 in trailing yearly profits.
Check out our latest analysis for Euromoney Institutional Investor
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Euromoney Institutional Investor:
P/E of 71.67 = GBP13.24 ÷ GBP0.18 (Based on the trailing twelve months to September 2019.)
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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Euromoney Institutional Investor's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Euromoney Institutional Investor has a much higher P/E than the average company (21.9) in the media industry.
Euromoney Institutional Investor's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. 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.
Euromoney Institutional Investor shrunk earnings per share by 70% over the last year. But over the longer term (3 years), earnings per share have increased by 1.9%. And it has shrunk its earnings per share by 21% per year over the last five years. This growth rate might warrant a below average P/E ratio.
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. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.