The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Poolia AB (publ)’s (STO:POOL B) P/E ratio could help you assess the value on offer. Poolia has a P/E ratio of 28.05, based on the last twelve months. That means that at current prices, buyers pay SEK28.05 for every SEK1 in trailing yearly profits.
See our latest analysis for Poolia
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 Poolia:
P/E of 28.05 = SEK7.44 ÷ SEK0.27 (Based on the year to December 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. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Poolia’s earnings per share fell by 64% in the last twelve months. But EPS is up 10% over the last 5 years. And EPS is down 46% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
How Does Poolia’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Poolia has a higher P/E than the average company (14.9) in the professional services industry.
Poolia’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Poolia’s P/E?
The extra options and safety that comes with Poolia’s kr17m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.