This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Surteco Group SE's (ETR:SUR) P/E ratio to inform your assessment of the investment opportunity. Surteco Group has a P/E ratio of 12.41, based on the last twelve months. That means that at current prices, buyers pay €12.41 for every €1 in trailing yearly profits.

See our latest analysis for Surteco Group

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Surteco Group:

P/E of 12.41 = €15.040 ÷ €1.212 (Based on the trailing twelve months to September 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings 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 Does Surteco Group's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (10.4) for companies in the consumer durables industry is lower than Surteco Group's P/E.

Its relatively high P/E ratio indicates that Surteco Group shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Surteco Group's earnings per share fell by 31% in the last twelve months. And it has shrunk its earnings per share by 8.7% per year over the last five years. This could justify a pessimistic P/E.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.