The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Ingenico Group - GCS's (EPA:ING) P/E ratio could help you assess the value on offer. Ingenico Group - GCS has a price to earnings ratio of 25.67, based on the last twelve months. That means that at current prices, buyers pay €25.67 for every €1 in trailing yearly profits.
View our latest analysis for Ingenico Group - GCS
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Ingenico Group - GCS:
P/E of 25.67 = €89.06 ÷ €3.47 (Based on the year to June 2019.)
Is A High Price-to-Earnings 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 Does Ingenico Group - GCS's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (11.8) for companies in the electronic industry is lower than Ingenico Group - GCS's P/E.
Ingenico Group - GCS's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
It's great to see that Ingenico Group - GCS grew EPS by 22% in the last year. And it has bolstered its earnings per share by 4.8% per year over the last five years. With that performance, you might expect an above average P/E ratio. In contrast, EPS has decreased by 2.9%, annually, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.