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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to APC Technology Group PLC's (LON:APC), to help you decide if the stock is worth further research. APC Technology Group has a P/E ratio of 20.66, based on the last twelve months. That corresponds to an earnings yield of approximately 4.8%.
View our latest analysis for APC Technology Group
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 APC Technology Group:
P/E of 20.66 = £0.095 ÷ £0.0046 (Based on the trailing twelve months to February 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 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by APC Technology Group earnings growth of 18% in the last year. But earnings per share are down 46% per year over the last five years.
How Does APC Technology Group's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below APC Technology Group has a P/E ratio that is fairly close for the average for the electronic industry, which is 20.9.
That indicates that the market expects APC Technology Group will perform roughly in line with other companies in its industry. So if APC Technology Group actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).