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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 EVS Broadcast Equipment S.A.'s (EBR:EVS) P/E ratio could help you assess the value on offer. What is EVS Broadcast Equipment's P/E ratio? Well, based on the last twelve months it is 9.97. That means that at current prices, buyers pay €9.97 for every €1 in trailing yearly profits.
Check out our latest analysis for EVS Broadcast Equipment
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 EVS Broadcast Equipment:
P/E of 9.97 = EUR20.40 ÷ EUR2.05 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 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.
How Does EVS Broadcast Equipment's P/E Ratio Compare To Its Peers?
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 EVS Broadcast Equipment has a lower P/E than the average (18.4) in the communications industry classification.
EVS Broadcast Equipment's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
EVS Broadcast Equipment's earnings per share grew by -9.0% in the last twelve months. But earnings per share are down 3.5% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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).