In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Berliner Effektengesellschaft AG's (FRA:BFV) P/E ratio and reflect on what it tells us about the company's share price. Berliner Effektengesellschaft has a price to earnings ratio of 31.39, based on the last twelve months. That means that at current prices, buyers pay €31.39 for every €1 in trailing yearly profits.
Check out our latest analysis for Berliner Effektengesellschaft
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Berliner Effektengesellschaft:
P/E of 31.39 = €17.9 ÷ €0.57 (Based on the trailing twelve months to June 2019.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Berliner Effektengesellschaft's P/E Ratio Compare To Its Peers?
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 Berliner Effektengesellschaft has a higher P/E than the average (26) P/E for companies in the capital markets industry.
Its relatively high P/E ratio indicates that Berliner Effektengesellschaft shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Berliner Effektengesellschaft saw earnings per share decrease by 19% last year. But over the longer term (5 years) earnings per share have increased by 4.9%. And it has shrunk its earnings per share by 8.5% per year over the last three years. This could justify a low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.