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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Viking Line ABP's (HEL:VIK1V) P/E ratio could help you assess the value on offer. Based on the last twelve months, Viking Line ABP's P/E ratio is 22.77. That is equivalent to an earnings yield of about 4.4%.
See our latest analysis for Viking Line ABP
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 Viking Line ABP:
P/E of 22.77 = €18.2 ÷ €0.80 (Based on the trailing twelve months to June 2019.)
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 Does Viking Line ABP's P/E Ratio Compare To Its Peers?
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 (20.3) for companies in the hospitality industry is lower than Viking Line ABP's P/E.
Its relatively high P/E ratio indicates that Viking Line ABP shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Notably, Viking Line ABP grew EPS by a whopping 48% in the last year. But earnings per share are down 5.8% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Viking Line ABP's Balance Sheet
Net debt is 43% of Viking Line ABP's market cap. While it's worth keeping this in mind, it isn't a worry.