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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use VERBIO Vereinigte BioEnergie AG's (ETR:VBK) P/E ratio to inform your assessment of the investment opportunity. What is VERBIO Vereinigte BioEnergie's P/E ratio? Well, based on the last twelve months it is 8.75. In other words, at today's prices, investors are paying €8.75 for every €1 in prior year profit.
View our latest analysis for VERBIO Vereinigte BioEnergie
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for VERBIO Vereinigte BioEnergie:
P/E of 8.75 = €7.37 ÷ €0.84 (Based on the trailing twelve months to March 2019.)
Is A High P/E 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 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.
VERBIO Vereinigte BioEnergie's earnings made like a rocket, taking off 135% last year. The sweetener is that the annual five year growth rate of 53% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
Does VERBIO Vereinigte BioEnergie Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (8.7) for companies in the oil and gas industry is roughly the same as VERBIO Vereinigte BioEnergie's P/E.
VERBIO Vereinigte BioEnergie's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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.