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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 Volution Group plc’s (LON:FAN) P/E ratio and reflect on what it tells us about the company’s share price. Volution Group has a price to earnings ratio of 22.72, based on the last twelve months. In other words, at today’s prices, investors are paying £22.72 for every £1 in prior year profit.
View our latest analysis for Volution 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 Volution Group:
P/E of 22.72 = £1.52 ÷ £0.067 (Based on the year to July 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each £1 the company has earned over the last year. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Volution Group’s earnings per share fell by 3.9% in the last twelve months. But it has grown its earnings per share by 46% per year over the last five years.
How Does Volution Group’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, Volution Group has a higher P/E than the average company (14.1) in the building industry.
That means that the market expects Volution Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. 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. That means it doesn’t take debt or cash into account. 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.