This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Vincenzo Zucchi S.p.A.’s (BIT:ZUC) P/E ratio could help you assess the value on offer. Vincenzo Zucchi has a P/E ratio of 13.76, based on the last twelve months. That is equivalent to an earnings yield of about 7.3%.

Check out our latest analysis for Vincenzo Zucchi

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Vincenzo Zucchi:

P/E of 13.76 = €0.019 ÷ €0.0014 (Based on the trailing twelve months to September 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Vincenzo Zucchi’s earnings per share fell by 52% in the last twelve months.

How Does Vincenzo Zucchi’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 Vincenzo Zucchi has a lower P/E than the average (15.2) P/E for companies in the luxury industry.

Vincenzo Zucchi’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or 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. 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.

Vincenzo Zucchi’s Balance Sheet

Vincenzo Zucchi has net debt worth a very significant 156% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.