In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Francotyp-Postalia Holding AG’s (ETR:FPH) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Francotyp-Postalia Holding’s P/E ratio is 12.78. That is equivalent to an earnings yield of about 7.8%.
See our latest analysis for Francotyp-Postalia Holding
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 Francotyp-Postalia Holding:
P/E of 12.78 = €3.53 ÷ €0.28 (Based on the trailing twelve months to September 2018.)
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. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Francotyp-Postalia Holding saw earnings per share improve by -3.9% last year. And earnings per share have improved by 8.8% annually, over the last three years. In contrast, EPS has decreased by 1.4%, annually, over 5 years.
How Does Francotyp-Postalia Holding’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Francotyp-Postalia Holding has a lower P/E than the average (15.8) P/E for companies in the commercial services industry.
Its relatively low P/E ratio indicates that Francotyp-Postalia Holding shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.