Why DMG MORI AKTIENGESELLSCHAFT’s (FRA:GIL) High P/E Ratio Isn’t Necessarily A Bad Thing

Brent Freeman

Sun, Feb 17, 2019, 11:17 PM

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 DMG MORI AKTIENGESELLSCHAFT’s (FRA:GIL) P/E ratio could help you assess the value on offer. DMG MORI has a P/E ratio of 25.96, based on the last twelve months. In other words, at today’s prices, investors are paying €25.96 for every €1 in prior year profit.

See our latest analysis for DMG MORI

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for DMG MORI:

P/E of 25.96 = €43.3 ÷ €1.67 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

DMG MORI increased earnings per share by a whopping 127% last year. Unfortunately, earnings per share are down 2.0% a year, over 5 years.

How Does DMG MORI’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that DMG MORI has a higher P/E than the average (14.9) P/E for companies in the machinery industry.

Its relatively high P/E ratio indicates that DMG MORI shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).