This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at AKKA Technologies SE's (EPA:AKA) P/E ratio and reflect on what it tells us about the company's share price. AKKA Technologies has a price to earnings ratio of 21.85, based on the last twelve months. That means that at current prices, buyers pay €21.85 for every €1 in trailing yearly profits.
See our latest analysis for AKKA Technologies
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 AKKA Technologies:
P/E of 21.85 = €63.60 ÷ €2.91 (Based on the year to June 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does AKKA Technologies Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that AKKA Technologies has a higher P/E than the average (16.8) P/E for companies in the professional services industry.
Its relatively high P/E ratio indicates that AKKA Technologies shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, AKKA Technologies grew EPS by a whopping 38% in the last year. And earnings per share have improved by 16% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 investing in growth. That means taking on debt (or spending its cash).
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.