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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 TOYA Spólka Akcyjna's (WSE:TOA) P/E ratio could help you assess the value on offer. Based on the last twelve months, TOYA Spólka Akcyjna's P/E ratio is 8.84. In other words, at today's prices, investors are paying PLN8.84 for every PLN1 in prior year profit.

Check out our latest analysis for TOYA Spólka Akcyjna

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 TOYA Spólka Akcyjna:

P/E of 8.84 = PLN5.25 ÷ PLN0.59 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.

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. Then, a lower P/E should attract more buyers, pushing the share price up.

TOYA Spólka Akcyjna increased earnings per share by an impressive 13% over the last twelve months. And earnings per share have improved by 12% annually, over the last five years. With that performance, you might expect an above average P/E ratio.

Does TOYA Spólka Akcyjna Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below TOYA Spólka Akcyjna has a P/E ratio that is fairly close for the average for the consumer durables industry, which is 9.1.

That indicates that the market expects TOYA Spólka Akcyjna will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.