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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Geke S.A.'s (ATH:PRESD) P/E ratio and reflect on what it tells us about the company's share price. What is Geke's P/E ratio? Well, based on the last twelve months it is 13.43. That corresponds to an earnings yield of approximately 7.4%.
Check out our latest analysis for Geke
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Geke:
P/E of 13.43 = €4.84 ÷ €0.36 (Based on the trailing twelve months to December 2018.)
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. 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 Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's great to see that Geke grew EPS by 21% in the last year. And its annual EPS growth rate over 5 years is 42%. With that performance, you might expect an above average P/E ratio.
How Does Geke's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (19.4) for companies in the hospitality industry is higher than Geke's P/E.
Its relatively low P/E ratio indicates that Geke shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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.