This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Asiakastieto Group Oyj's (HEL:ATG1V) P/E ratio to inform your assessment of the investment opportunity. Asiakastieto Group Oyj has a price to earnings ratio of 37.76, based on the last twelve months. In other words, at today's prices, investors are paying €37.76 for every €1 in prior year profit.

See our latest analysis for Asiakastieto Group Oyj

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Asiakastieto Group Oyj:

P/E of 37.76 = €30.30 ÷ €0.80 (Based on the year to September 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

Does Asiakastieto Group Oyj 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. The image below shows that Asiakastieto Group Oyj has a P/E ratio that is roughly in line with the professional services industry average (36.5).

That indicates that the market expects Asiakastieto Group 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. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Asiakastieto Group Oyj increased earnings per share by a whopping 47% last year. In contrast, EPS has decreased by 8.3%, annually, over 3 years.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.