In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Graines Voltz’s (EPA:GRVO) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Graines Voltz’s P/E ratio is 11.08. That corresponds to an earnings yield of approximately 9.0%.
Check out our latest analysis for Graines Voltz
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 Graines Voltz:
P/E of 11.08 = €36 ÷ €3.25 (Based on the year to March 2018.)
Is A High P/E 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
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Graines Voltz increased earnings per share by a whopping 44% last year. But earnings per share are down 4.7% per year over the last five years.
How Does Graines Voltz’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 (11.6) for companies in the retail distributors industry is roughly the same as Graines Voltz’s P/E.
Graines Voltz’s P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. 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
The ‘Price’ in P/E reflects the market capitalization of the company. 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 taking on debt (or spending its remaining cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Graines Voltz’s Debt Impact Its P/E Ratio?
Graines Voltz’s net debt is 39% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.