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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 FDM Group (Holdings) plc's (LON:FDM) P/E ratio and reflect on what it tells us about the company's share price. FDM Group (Holdings) has a P/E ratio of 28.55, based on the last twelve months. In other words, at today's prices, investors are paying £28.55 for every £1 in prior year profit.
Check out our latest analysis for FDM Group (Holdings)
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 FDM Group (Holdings):
P/E of 28.55 = £9.8 ÷ £0.34 (Based on the year 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
FDM Group (Holdings) increased earnings per share by an impressive 15% over the last twelve months. And it has bolstered its earnings per share by 20% per year over the last five years. So one might expect an above average P/E ratio.
How Does FDM Group (Holdings)'s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that FDM Group (Holdings) has a P/E ratio that is roughly in line with the it industry average (28.6).
Its P/E ratio suggests that FDM Group (Holdings) shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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.