In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at De'Longhi S.p.A.'s (BIT:DLG) P/E ratio and reflect on what it tells us about the company's share price. De'Longhi has a price to earnings ratio of 16.31, based on the last twelve months. That means that at current prices, buyers pay €16.31 for every €1 in trailing yearly profits.
See our latest analysis for De'Longhi
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 De'Longhi:
P/E of 16.31 = €18.68 ÷ €1.15 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 De'Longhi Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (14.6) for companies in the consumer durables industry is lower than De'Longhi's P/E.
De'Longhi'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 further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.
De'Longhi saw earnings per share decrease by 2.9% last year. But it has grown its earnings per share by 7.7% per year over the last five years.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
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).
So What Does De'Longhi's Balance Sheet Tell Us?
De'Longhi has net cash of €178m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.