This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Straumann Holding AG’s (VTX:STMN) P/E ratio and reflect on what it tells us about the company’s share price. Straumann Holding has a P/E ratio of 37.81, based on the last twelve months. That corresponds to an earnings yield of approximately 2.6%.
See our latest analysis for Straumann Holding
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 Straumann Holding:
P/E of 37.81 = CHF631.5 ÷ CHF16.7 (Based on the trailing twelve months 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 CHF1 the company has earned over the last year. 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. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Straumann Holding increased earnings per share by 9.8% last year. And earnings per share have improved by 27% annually, over the last five years.
How Does Straumann Holding’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 Straumann Holding has a higher P/E than the average (24.5) P/E for companies in the medical equipment industry.
That means that the market expects Straumann Holding will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Straumann Holding’s P/E?
Straumann Holding has net cash of CHF45m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.