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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Gelsenwasser AG's (FRA:WWG) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Gelsenwasser has a P/E ratio of 27.3. That corresponds to an earnings yield of approximately 3.7%.
Check out our latest analysis for Gelsenwasser
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 Gelsenwasser:
P/E of 27.3 = €865 ÷ €31.68 (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 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
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Gelsenwasser grew EPS by 18% in the last year. And earnings per share have improved by 4.0% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
Does Gelsenwasser 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. As you can see below, Gelsenwasser has a higher P/E than the average company (19.1) in the integrated utilities industry.
That means that the market expects Gelsenwasser will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).