In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use IAR Systems Group AB (publ)'s (STO:IAR B) P/E ratio to inform your assessment of the investment opportunity. IAR Systems Group has a price to earnings ratio of 34.28, based on the last twelve months. That means that at current prices, buyers pay SEK34.28 for every SEK1 in trailing yearly profits.
Check out our latest analysis for IAR Systems Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for IAR Systems Group:
P/E of 34.28 = SEK226 ÷ SEK6.59 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each SEK1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does IAR Systems Group 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. You can see in the image below that the average P/E (34.3) for companies in the software industry is roughly the same as IAR Systems Group's P/E.
IAR Systems Group's P/E tells us that market participants think its prospects are roughly in line with its industry. So if IAR Systems Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
IAR Systems Group saw earnings per share improve by -7.4% last year. And it has bolstered its earnings per share by 17% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.