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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Thessaloniki Water Supply & Sewerage Co. S.A.'s (ATH:EYAPS) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Thessaloniki Water Supply & Sewerage's P/E ratio is 12. That corresponds to an earnings yield of approximately 8.3%.
View our latest analysis for Thessaloniki Water Supply & Sewerage
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Thessaloniki Water Supply & Sewerage:
P/E of 12 = €4.63 ÷ €0.39 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Thessaloniki Water Supply & Sewerage's earnings per share fell by 15% in the last twelve months. But EPS is up 1.4% over the last 5 years.
Does Thessaloniki Water Supply & Sewerage Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (15.6) for companies in the water utilities industry is higher than Thessaloniki Water Supply & Sewerage's P/E.
Its relatively low P/E ratio indicates that Thessaloniki Water Supply & Sewerage shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).