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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 REN - Redes Energéticas Nacionais, SGPS, S.A.'s (ELI:RENE) P/E ratio could help you assess the value on offer. REN - Redes Energéticas Nacionais SGPS has a price to earnings ratio of 14.22, based on the last twelve months. That is equivalent to an earnings yield of about 7.0%.
View our latest analysis for REN - Redes Energéticas Nacionais SGPS
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for REN - Redes Energéticas Nacionais SGPS:
P/E of 14.22 = €2.49 ÷ €0.17 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
REN - Redes Energéticas Nacionais SGPS's earnings per share fell by 3.0% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 4.8% annually. So it would be surprising to see a high P/E.
Does REN - Redes Energéticas Nacionais SGPS Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (20.6) for companies in the integrated utilities industry is higher than REN - Redes Energéticas Nacionais SGPS's P/E.
This suggests that market participants think REN - Redes Energéticas Nacionais SGPS will underperform other companies in its industry. Since the market seems unimpressed with REN - Redes Energéticas Nacionais SGPS, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.