Do You Know What DEMIRE Deutsche Mittelstand Real Estate AG's (ETR:DMRE) P/E Ratio Means?

Simply Wall St

Wed, Jun 12, 2019, 6:16 AM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how DEMIRE Deutsche Mittelstand Real Estate AG's (ETR:DMRE) P/E ratio could help you assess the value on offer. DEMIRE Deutsche Mittelstand Real Estate has a price to earnings ratio of 8.43, based on the last twelve months. That is equivalent to an earnings yield of about 12%.

View our latest analysis for DEMIRE Deutsche Mittelstand Real Estate

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for DEMIRE Deutsche Mittelstand Real Estate:

P/E of 8.43 = €4.85 ÷ €0.58 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

DEMIRE Deutsche Mittelstand Real Estate saw earnings per share decrease by 1.9% last year. And over the longer term (3 years) earnings per share have decreased 14% annually. So we might expect a relatively low P/E.

Does DEMIRE Deutsche Mittelstand Real Estate Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see DEMIRE Deutsche Mittelstand Real Estate has a lower P/E than the average (15.2) in the real estate industry classification.

XTRA:DMRE Price Estimation Relative to Market, June 12th 2019

Its relatively low P/E ratio indicates that DEMIRE Deutsche Mittelstand Real Estate shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.