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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how AMAG Austria Metall AG's (VIE:AMAG) P/E ratio could help you assess the value on offer. What is AMAG Austria Metall's P/E ratio? Well, based on the last twelve months it is 33.19. That corresponds to an earnings yield of approximately 3.0%.
Check out our latest analysis for AMAG Austria Metall
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 AMAG Austria Metall:
P/E of 33.19 = EUR29.30 ÷ EUR0.88 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does AMAG Austria Metall 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. As you can see below, AMAG Austria Metall has a much higher P/E than the average company (10.6) in the metals and mining industry.
Its relatively high P/E ratio indicates that AMAG Austria Metall 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.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
AMAG Austria Metall's earnings per share fell by 46% in the last twelve months. And EPS is down 9.5% a year, over the last 5 years. This could justify a pessimistic P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).