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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at MultiQ International AB (publ)'s (STO:MULQ) P/E ratio and reflect on what it tells us about the company's share price. MultiQ International has a price to earnings ratio of 25.91, based on the last twelve months. That is equivalent to an earnings yield of about 3.9%.
View our latest analysis for MultiQ International
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 MultiQ International:
P/E of 25.91 = SEK0.93 ÷ SEK0.036 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 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 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.
MultiQ International's 298% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
Does MultiQ International 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. As you can see below, MultiQ International has a higher P/E than the average company (20.4) in the tech industry.
MultiQ International's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. 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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.