In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Abéo SA's (EPA:ABEO) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Abéo's P/E ratio is 26.60. That means that at current prices, buyers pay €26.60 for every €1 in trailing yearly profits.
Check out our latest analysis for Abéo
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 Abéo:
P/E of 26.60 = €25.00 ÷ €0.94 (Based on the trailing twelve months to March 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Abéo Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Abéo has a higher P/E than the average (16.4) P/E for companies in the leisure industry.
That means that the market expects Abéo will outperform other companies in its industry. 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Abéo's earnings per share fell by 10.0% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 6.8%.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
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.