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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Robert Walters plc’s (LON:RWA) P/E ratio to inform your assessment of the investment opportunity. Robert Walters has a price to earnings ratio of 11.63, based on the last twelve months. In other words, at today’s prices, investors are paying £11.63 for every £1 in prior year profit.
See our latest analysis for Robert Walters
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 Robert Walters:
P/E of 11.63 = £5.54 ÷ £0.48 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each £1 the company has earned over the last year. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Notably, Robert Walters grew EPS by a whopping 42% in the last year. And its annual EPS growth rate over 5 years is 35%. So we’d generally expect it to have a relatively high P/E ratio.
How Does Robert Walters’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Robert Walters has a lower P/E than the average (18.9) P/E for companies in the professional services industry.
This suggests that market participants think Robert Walters will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.