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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how AKKO Invest Nyrt.'s (BUSE:AKKO) P/E ratio could help you assess the value on offer. AKKO Invest Nyrt has a P/E ratio of 20.99, based on the last twelve months. In other words, at today's prices, investors are paying HUF20.99 for every HUF1 in prior year profit.
See our latest analysis for AKKO Invest Nyrt
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for AKKO Invest Nyrt:
P/E of 20.99 = HUF21600 ÷ HUF1029 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HUF1 the company has earned over the last year. 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. 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.
AKKO Invest Nyrt shrunk earnings per share by 27% over the last year. But over the longer term (5 years) earnings per share have increased by 4.4%.
How Does AKKO Invest Nyrt's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (17.7) for companies in the capital markets industry is lower than AKKO Invest Nyrt's P/E.
That means that the market expects AKKO Invest Nyrt will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.