The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Phoenix Mecano AG’s (VTX:PM) P/E ratio to inform your assessment of the investment opportunity. Phoenix Mecano has a P/E ratio of 23.39, based on the last twelve months. That means that at current prices, buyers pay CHF23.39 for every CHF1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Phoenix Mecano:
P/E of 23.39 = €344.688 ÷ €14.735 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely EUR and the calculation results may not be precise due to rounding.)
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. 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.
Does Phoenix Mecano 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. As you can see below Phoenix Mecano has a P/E ratio that is fairly close for the average for the electrical industry, which is 23.4.
Its P/E ratio suggests that Phoenix Mecano shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Phoenix Mecano saw earnings per share decrease by 61% last year. And EPS is down 6.9% a year, over the last 5 years. This might lead to muted expectations.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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 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.
Is Debt Impacting Phoenix Mecano’s P/E?
Net debt is 27% of Phoenix Mecano’s market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Bottom Line On Phoenix Mecano’s P/E Ratio
Phoenix Mecano has a P/E of 23.4. That’s higher than the average in its market, which is 17.9. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.