Should We Worry About Pfeiffer Vacuum Technology AG's (FRA:PFV) P/E Ratio?

Simply Wall St

Sat, Jun 1, 2019, 1:52 AM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Pfeiffer Vacuum Technology AG's (FRA:PFV) P/E ratio to inform your assessment of the investment opportunity. Pfeiffer Vacuum Technology has a P/E ratio of 19.76, based on the last twelve months. That corresponds to an earnings yield of approximately 5.1%.

View our latest analysis for Pfeiffer Vacuum Technology

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Pfeiffer Vacuum Technology:

P/E of 19.76 = €124.2 ÷ €6.28 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Pfeiffer Vacuum Technology saw earnings per share improve by -5.2% last year. And its annual EPS growth rate over 5 years is 13%.

How Does Pfeiffer Vacuum Technology's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Pfeiffer Vacuum Technology has a higher P/E than the average company (15.8) in the machinery industry.

DB:PFV Price Estimation Relative to Market, June 1st 2019

Pfeiffer Vacuum Technology'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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.