This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Rieter Holding AG’s (VTX:RIEN) P/E ratio and reflect on what it tells us about the company’s share price. Rieter Holding has a P/E ratio of 43.22, based on the last twelve months. That is equivalent to an earnings yield of about 2.3%.
See our latest analysis for Rieter Holding
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 Rieter Holding:
P/E of 43.22 = CHF126.1 ÷ CHF2.92 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CHF1 the company has earned over the last year. 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
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Rieter Holding’s earnings per share fell by 69% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 8.9% annually. This growth rate might warrant a below average P/E ratio.
How Does Rieter Holding’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Rieter Holding has a higher P/E than the average (18.9) P/E for companies in the machinery industry.
Rieter Holding’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or 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. 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).
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).
How Does Rieter Holding’s Debt Impact Its P/E Ratio?
Since Rieter Holding holds net cash of CHF47m, it can spend on growth, justifying a higher P/E ratio than otherwise.