The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Ottakringer Getränke AG's (VIE:OTS) P/E ratio could help you assess the value on offer. Ottakringer Getränke has a price to earnings ratio of 34.73, based on the last twelve months. That is equivalent to an earnings yield of about 2.9%.

See our latest analysis for Ottakringer Getränke

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Ottakringer Getränke:

P/E of 34.73 = €132.00 ÷ €3.80 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. 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 Does Ottakringer Getränke's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (20.7) for companies in the beverage industry is lower than Ottakringer Getränke's P/E.

That means that the market expects Ottakringer Getränke will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Most would be impressed by Ottakringer Getränke earnings growth of 14% in the last year. And its annual EPS growth rate over 5 years is 3.7%. With that performance, you might expect an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.