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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Dierig Holding AG's (ETR:DIE), to help you decide if the stock is worth further research. Based on the last twelve months, Dierig Holding's P/E ratio is 21.83. That corresponds to an earnings yield of approximately 4.6%.
See our latest analysis for Dierig Holding
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 Dierig Holding:
P/E of 21.83 = €16.3 ÷ €0.75 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
Does Dierig Holding Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Dierig Holding has a higher P/E than the average company (18.8) in the luxury industry.
Its relatively high P/E ratio indicates that Dierig 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.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Dierig Holding increased earnings per share by an impressive 21% over the last twelve months. In contrast, EPS has decreased by 5.9%, annually, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Dierig Holding's Debt Impact Its P/E Ratio?
Net debt totals 61% of Dierig Holding's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.