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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 show how you can use PannErgy Plc's (BUSE:PANNERGY) P/E ratio to inform your assessment of the investment opportunity. PannErgy has a P/E ratio of 30.57, based on the last twelve months. That means that at current prices, buyers pay HUF30.57 for every HUF1 in trailing yearly profits.
See our latest analysis for PannErgy
How Do I Calculate PannErgy's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for PannErgy:
P/E of 30.57 = HUF720 ÷ HUF23.55 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.'
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
PannErgy shrunk earnings per share by 15% over the last year. But it has grown its earnings per share by 77% per year over the last three years.
Does PannErgy Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that PannErgy has a higher P/E than the average (26.7) P/E for companies in the renewable energy industry.
That means that the market expects PannErgy will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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).