What Does iGrandiViaggi S.p.A.'s (BIT:IGV) P/E Ratio Tell You?

Simply Wall St

Wed, Jun 12, 2019, 5:47 AM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how iGrandiViaggi S.p.A.'s (BIT:IGV) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, iGrandiViaggi has a P/E ratio of 75.29. In other words, at today's prices, investors are paying €75.29 for every €1 in prior year profit.

View our latest analysis for iGrandiViaggi

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 iGrandiViaggi:

P/E of 75.29 = €1.62 ÷ €0.021 (Based on the year to January 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

iGrandiViaggi shrunk earnings per share by 4.6% last year.

Does iGrandiViaggi Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (19.5) for companies in the hospitality industry is a lot lower than iGrandiViaggi's P/E.

BIT:IGV Price Estimation Relative to Market, June 12th 2019

Its relatively high P/E ratio indicates that iGrandiViaggi shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.