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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Ekobox S.A.'s (WSE:EBX) P/E ratio and reflect on what it tells us about the company's share price. Ekobox has a P/E ratio of 26.53, based on the last twelve months. That corresponds to an earnings yield of approximately 3.8%.

See our latest analysis for Ekobox

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 Ekobox:

P/E of 26.53 = PLN0.46 ÷ PLN0.017 (Based on the trailing twelve months to March 2019.)

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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.

It's great to see that Ekobox grew EPS by 24% in the last year. In contrast, EPS has decreased by 8.1%, annually, over 5 years.

How Does Ekobox'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. As you can see below, Ekobox has a much higher P/E than the average company (6.4) in the construction industry.

That means that the market expects Ekobox will outperform other companies in its industry. 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.

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

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).