Is TAG Immobilien AG's (FRA:TEG) P/E Ratio Really That Good?

Simply Wall St

Mon, Jun 10, 2019, 4:04 AM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at TAG Immobilien AG's (FRA:TEG) P/E ratio and reflect on what it tells us about the company's share price. What is TAG Immobilien's P/E ratio? Well, based on the last twelve months it is 6.16. That corresponds to an earnings yield of approximately 16%.

View our latest analysis for TAG Immobilien

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for TAG Immobilien:

P/E of 6.16 = €20.5 ÷ €3.33 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, TAG Immobilien grew EPS like Taylor Swift grew her fan base back in 2010; the 54% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 66% per year. So I'd be surprised if the P/E ratio was not above average.

How Does TAG Immobilien's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see TAG Immobilien has a lower P/E than the average (16.1) in the real estate industry classification.

DB:TEG Price Estimation Relative to Market, June 10th 2019

This suggests that market participants think TAG Immobilien will underperform other companies in its industry. Since the market seems unimpressed with TAG Immobilien, it's quite possible it could surprise on the upside. 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

Don't forget that the P/E ratio considers market capitalization. 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.