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 Valora Holding AG’s (VTX:VALN) P/E ratio could help you assess the value on offer. Valora Holding has a price to earnings ratio of 17.56, based on the last twelve months. In other words, at today’s prices, investors are paying CHF17.56 for every CHF1 in prior year profit.
View our latest analysis for Valora Holding
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Valora Holding:
P/E of 17.56 = CHF251.5 ÷ CHF14.32 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Valora Holding saw earnings per share decrease by 28% last year. But EPS is up 20% over the last 5 years.
How Does Valora Holding’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Valora Holding has a higher P/E than the average company (12.4) in the specialty retail industry.
Its relatively high P/E ratio indicates that Valora Holding shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Valora Holding’s Debt Impact Its P/E Ratio?
Valora Holding has net debt worth 30% of its market capitalization. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.