Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Admicom Oyj's (HEL:ADMCM), to help you decide if the stock is worth further research. Admicom Oyj has a price to earnings ratio of 50.86, based on the last twelve months. In other words, at today's prices, investors are paying €50.86 for every €1 in prior year profit.

View our latest analysis for Admicom Oyj

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Admicom Oyj:

P/E of 50.86 = €47.9 ÷ €0.94 (Based on the trailing twelve months to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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 Does Admicom Oyj's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (54.2) for companies in the software industry is roughly the same as Admicom Oyj's P/E.

That indicates that the market expects Admicom Oyj will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Admicom Oyj's earnings made like a rocket, taking off 103% last year.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. 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).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Admicom Oyj's Debt Impact Its P/E Ratio?

Admicom Oyj has net cash of €12m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.