This article is written for those who want to get better at using price to earnings ratios (P/E ratios).
We’ll look at Viscom AG’s (ETR:V6C) P/E ratio and reflect on what it tells us about the company’s share price.
Based on the last twelve months, Viscom’s P/E ratio is 21.38.
That means that at current prices, buyers pay €21.38 for every €1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Viscom:
P/E of 21.38 = €17.6 ÷ €0.82
(Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business.
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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates.
Earnings growth means that in the future the ‘E’ will be higher.
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.
Viscom saw earnings per share decrease by 37% last year.
But it has grown its earnings per share by 14% per year over the last five years.
How Does Viscom’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company.
If you look at the image below, you can see Viscom has a lower P/E than the average (24.9) in the electronic industry classification.
This suggests that market participants think Viscom will underperform other companies in its industry.
Many investors like to buy stocks when the market is pessimistic about their prospects.
If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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.
In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
Is Debt Impacting Viscom’s P/E?
Since Viscom holds net cash of €399k, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Viscom’s P/E Ratio
Viscom’s P/E is 21.4 which is above average (19.5) in the DE market.
The recent drop in earnings per share would make some investors cautious,
but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
When the market is wrong about a stock, it gives savvy investors an opportunity.
People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated.
So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Viscom. So you may wish to see this free collection of other companies that have grown earnings strongly.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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