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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 apply a basic P/E ratio analysis to Payton Planar Magnetics Ltd.'s (EBR:PAY), to help you decide if the stock is worth further research. Payton Planar Magnetics has a P/E ratio of 12.50, based on the last twelve months. In other words, at today's prices, investors are paying €12.50 for every €1 in prior year profit.
See our latest analysis for Payton Planar Magnetics
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Payton Planar Magnetics:
P/E of 12.50 = USD7.21 (Note: this is the share price in the reporting currency, namely, USD ) ÷ USD0.58 (Based on the year to June 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.
Does Payton Planar Magnetics Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Payton Planar Magnetics has a lower P/E than the average (20.9) P/E for companies in the electronic industry.
This suggests that market participants think Payton Planar Magnetics will underperform other companies in its industry. Since the market seems unimpressed with Payton Planar Magnetics, 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Payton Planar Magnetics increased earnings per share by an impressive 16% over the last twelve months. And earnings per share have improved by 53% annually, over the last five years. So one might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.