Don't Sell Stalprodukt S.A. (WSE:STP) Before You Read This

Simply Wall St

Sun, Jun 9, 2019, 1:16 AM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Stalprodukt S.A.'s (WSE:STP) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Stalprodukt has a P/E ratio of 6.33. That means that at current prices, buyers pay PLN6.33 for every PLN1 in trailing yearly profits.

See our latest analysis for Stalprodukt

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 Stalprodukt:

P/E of 6.33 = PLN240 ÷ PLN37.89 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Stalprodukt saw earnings per share decrease by 22% last year. But EPS is up 32% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 1.5% annually. This might lead to low expectations.

Does Stalprodukt 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 (6.3) for companies in the metals and mining industry is roughly the same as Stalprodukt's P/E.

WSE:STP Price Estimation Relative to Market, June 9th 2019

Its P/E ratio suggests that Stalprodukt shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).