This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how ADLPartner's (EPA:ALP) P/E ratio could help you assess the value on offer. What is ADLPartner's P/E ratio? Well, based on the last twelve months it is 6.52. That is equivalent to an earnings yield of about 15.3%.
Check out our latest analysis for ADLPartner
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 ADLPartner:
P/E of 6.52 = €15.20 ÷ €2.33 (Based on the trailing twelve months to December 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 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.
Does ADLPartner Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see ADLPartner has a lower P/E than the average (13.8) in the media industry classification.
Its relatively low P/E ratio indicates that ADLPartner shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with ADLPartner, 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
ADLPartner's 123% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 38% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.