Do You Know What North Coast S.A.'s (WSE:NCT) P/E Ratio Means?

Simply Wall St

Sun, Jun 9, 2019, 2:22 AM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use North Coast S.A.'s (WSE:NCT) P/E ratio to inform your assessment of the investment opportunity. North Coast has a price to earnings ratio of 2.14, based on the last twelve months. That corresponds to an earnings yield of approximately 47%.

Check out our latest analysis for North Coast

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for North Coast:

P/E of 2.14 = PLN4.7 ÷ PLN2.2 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each PLN1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

North Coast's earnings made like a rocket, taking off 50% last year.

Does North Coast Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see North Coast has a lower P/E than the average (33.2) in the consumer retailing industry classification.

WSE:NCT Price Estimation Relative to Market, June 9th 2019

North Coast's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.

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. Thus, the metric does not reflect cash or debt held by the company. 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).