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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Vetoquinol SA's (EPA:VETO) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Vetoquinol's P/E ratio is 17.63. That means that at current prices, buyers pay €17.63 for every €1 in trailing yearly profits.

Check out our latest analysis for Vetoquinol

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Vetoquinol:

P/E of 17.63 = €54 ÷ €3.06 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

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. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Vetoquinol's earnings per share grew by -4.2% in the last twelve months. And its annual EPS growth rate over 5 years is 9.0%.

How Does Vetoquinol's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Vetoquinol has a lower P/E than the average (21.6) P/E for companies in the pharmaceuticals industry.

This suggests that market participants think Vetoquinol will underperform other companies in its industry. Since the market seems unimpressed with Vetoquinol, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.