Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Petros Petropoulos AEBE's (ATH:PETRO) P/E ratio could help you assess the value on offer. Petros Petropoulos AEBE has a P/E ratio of 11.53, based on the last twelve months. In other words, at today's prices, investors are paying €11.53 for every €1 in prior year profit.
See our latest analysis for Petros Petropoulos AEBE
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Petros Petropoulos AEBE:
P/E of 11.53 = €5.700 ÷ €0.494 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
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. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Petros Petropoulos AEBE Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Petros Petropoulos AEBE has a lower P/E than the average (13.3) P/E for companies in the machinery industry.
Petros Petropoulos AEBE's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Petros Petropoulos AEBE increased earnings per share by a whopping 36% last year. And it has bolstered its earnings per share by 19% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.