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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 look at EnBW Energie Baden-Württemberg AG’s (FRA:EBK) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, EnBW Energie Baden-Württemberg’s P/E ratio is 13.09. That means that at current prices, buyers pay €13.09 for every €1 in trailing yearly profits.
See our latest analysis for EnBW Energie Baden-Württemberg
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 EnBW Energie Baden-Württemberg:
P/E of 13.09 = €31.6 ÷ €2.41 (Based on the year to September 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that EnBW Energie Baden-Württemberg grew EPS by a stonking 148% in the last year. And it has bolstered its earnings per share by 25% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does EnBW Energie Baden-Württemberg’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that EnBW Energie Baden-Württemberg has a P/E ratio that is roughly in line with the electric utilities industry average (12.2).
That indicates that the market expects EnBW Energie Baden-Württemberg will perform roughly in line with other companies in its industry. So if EnBW Energie Baden-Württemberg actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.