In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to AF Gruppen ASA's (OB:AFG), to help you decide if the stock is worth further research. AF Gruppen has a P/E ratio of 20.4, based on the last twelve months. That corresponds to an earnings yield of approximately 4.9%.
Check out our latest analysis for AF Gruppen
How Do I Calculate AF Gruppen's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for AF Gruppen:
P/E of 20.4 = NOK183 ÷ NOK8.97 (Based on the year to June 2019.)
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 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 AF Gruppen's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, AF Gruppen has a higher P/E than the average company (11) in the construction industry.
Its relatively high P/E ratio indicates that AF Gruppen 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 delve deeper. I like to check if company insiders have been buying or selling.
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. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
AF Gruppen increased earnings per share by a whopping 35% last year. And its annual EPS growth rate over 5 years is 11%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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 AF Gruppen's Debt Impact Its P/E Ratio?
Net debt totals just 6.6% of AF Gruppen's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.