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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at DEAG Deutsche Entertainment Aktiengesellschaft's (ETR:ERMK) P/E ratio and reflect on what it tells us about the company's share price. DEAG Deutsche Entertainment has a price to earnings ratio of 32.43, based on the last twelve months. That corresponds to an earnings yield of approximately 3.1%.
View our latest analysis for DEAG Deutsche Entertainment
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 DEAG Deutsche Entertainment:
P/E of 32.43 = €4.58 ÷ €0.14 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, DEAG Deutsche Entertainment grew EPS like Taylor Swift grew her fan base back in 2010; the 222% gain was both fast and well deserved. Unfortunately, earnings per share are down 13% a year, over 5 years.
How Does DEAG Deutsche Entertainment'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 DEAG Deutsche Entertainment has a higher P/E than the average (24.1) P/E for companies in the entertainment industry.
That means that the market expects DEAG Deutsche Entertainment will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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).