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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 look at SIPEF NV’s (EBR:SIP) P/E ratio and reflect on what it tells us about the company’s share price. SIPEF has a price to earnings ratio of 10.75, based on the last twelve months. That means that at current prices, buyers pay €10.75 for every €1 in trailing yearly profits.
Check out our latest analysis for SIPEF
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for SIPEF:
P/E of 10.75 = $58.55 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $5.45 (Based on the trailing twelve months to June 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
SIPEF shrunk earnings per share by 64% over the last year. But EPS is up 15% over the last 5 years.
How Does SIPEF’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (24.4) for companies in the food industry is higher than SIPEF’s P/E.
Its relatively low P/E ratio indicates that SIPEF shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.