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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Medicover AB (publ)'s (STO:MCOV B), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Medicover has a P/E ratio of 47.93. That is equivalent to an earnings yield of about 2.1%.
View our latest analysis for Medicover
How Do I Calculate Medicover's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Medicover:
P/E of 47.93 = €8.19 (Note: this is the share price in the reporting currency, namely, EUR ) ÷ €0.17 (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
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. Then, a higher P/E might scare off shareholders, pushing the share price down.
Medicover saw earnings per share decrease by 4.1% last year. And it has shrunk its earnings per share by 5.6% per year over the last five years. So it would be surprising to see a high P/E.
Does Medicover 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. As you can see below, Medicover has a much higher P/E than the average company (15.5) in the healthcare industry.
Medicover's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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).