In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use InTiCa Systems AG’s (ETR:IS7) P/E ratio to inform your assessment of the investment opportunity. InTiCa Systems has a P/E ratio of 34.28, based on the last twelve months. That means that at current prices, buyers pay €34.28 for every €1 in trailing yearly profits.
See our latest analysis for InTiCa Systems
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 InTiCa Systems:
P/E of 34.28 = €6.25 ÷ €0.18 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that InTiCa Systems grew EPS by a stonking 218% in the last year. And it has bolstered its earnings per share by 26% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does InTiCa Systems’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 InTiCa Systems has a higher P/E than the average (22) P/E for companies in the electronic industry.
InTiCa Systems’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).