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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 show how you can use Koninklijke Ahold Delhaize N.V.'s (AMS:AD) P/E ratio to inform your assessment of the investment opportunity. Koninklijke Ahold Delhaize has a price to earnings ratio of 14.60, based on the last twelve months. That is equivalent to an earnings yield of about 6.9%.
View our latest analysis for Koninklijke Ahold Delhaize
How Do I Calculate Koninklijke Ahold Delhaize's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Koninklijke Ahold Delhaize:
P/E of 14.60 = €22.77 ÷ €1.56 (Based on the trailing twelve months to June 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. 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 Koninklijke Ahold Delhaize's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Koninklijke Ahold Delhaize has a lower P/E than the average (19.1) P/E for companies in the consumer retailing industry.
Koninklijke Ahold Delhaize's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Koninklijke Ahold Delhaize, it's quite possible it could surprise on the upside. 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. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Koninklijke Ahold Delhaize maintained roughly steady earnings over the last twelve months. But it has grown its earnings per share by 11% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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.