In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Link Prop Investment AB (publ)’s (STO:LINKAB) P/E ratio and reflect on what it tells us about the company’s share price. Link Prop Investment has a P/E ratio of 18.35, based on the last twelve months. In other words, at today’s prices, investors are paying SEK18.35 for every SEK1 in prior year profit.
View our latest analysis for Link Prop Investment
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Link Prop Investment:
P/E of 18.35 = SEK109 ÷ SEK5.94 (Based on the year to June 2018.)
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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Link Prop Investment increased earnings per share by 3.1% last year.
How Does Link Prop Investment’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Link Prop Investment has a higher P/E than the average (6.6) P/E for companies in the real estate industry.
Its relatively high P/E ratio indicates that Link Prop Investment shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.