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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to QinetiQ Group plc's (LON:QQ.), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, QinetiQ Group has a P/E ratio of 14.31. That means that at current prices, buyers pay £14.31 for every £1 in trailing yearly profits.
Check out our latest analysis for QinetiQ Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for QinetiQ Group:
P/E of 14.31 = £2.88 ÷ £0.20 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each £1 of company 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.
Does QinetiQ Group 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. The image below shows that QinetiQ Group has a lower P/E than the average (24.1) P/E for companies in the aerospace & defense industry.
Its relatively low P/E ratio indicates that QinetiQ Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with QinetiQ Group, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
QinetiQ Group's earnings per share fell by 18% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 14%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.