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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Corbion N.V.'s (AMS:CRBN) P/E ratio to inform your assessment of the investment opportunity. Corbion has a price to earnings ratio of 30.22, based on the last twelve months. In other words, at today's prices, investors are paying €30.22 for every €1 in prior year profit.
View our latest analysis for Corbion
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 Corbion:
P/E of 30.22 = €27.96 ÷ €0.93 (Based on the year to December 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 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 Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Corbion saw earnings per share decrease by 36% last year. But over the longer term (5 years) earnings per share have increased by 94%. And it has shrunk its earnings per share by 11% per year over the last three years. This growth rate might warrant a low P/E ratio.
Does Corbion 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. You can see in the image below that the average P/E (19.6) for companies in the chemicals industry is lower than Corbion's P/E.
Corbion's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.