The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Inmobiliaria del Sur, S.A.'s (BME:ISUR) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Inmobiliaria del Sur's P/E ratio is 43.92. That corresponds to an earnings yield of approximately 2.3%.

View our latest analysis for Inmobiliaria del Sur

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 Inmobiliaria del Sur:

P/E of 43.92 = €9.84 ÷ €0.22 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings 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. 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 Does Inmobiliaria del Sur's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Inmobiliaria del Sur has a higher P/E than the average company (20.5) in the real estate industry.

Its relatively high P/E ratio indicates that Inmobiliaria del Sur 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Inmobiliaria del Sur's earnings per share fell by 44% in the last twelve months.

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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.