Is CompuGroup Medical Societas Europaea’s (FRA:COP) High P/E Ratio A Problem For Investors?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how CompuGroup Medical Societas Europaea’s (FRA:COP) P/E ratio could help you assess the value on offer. CompuGroup Medical Societas Europaea has a price to earnings ratio of 32.74, based on the last twelve months. That corresponds to an earnings yield of approximately 3.1%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for CompuGroup Medical Societas Europaea:
P/E of 32.74 = €41.92 ÷ €1.28 (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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.
CompuGroup Medical Societas Europaea increased earnings per share by a whopping 56% last year. And earnings per share have improved by 16% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does CompuGroup Medical Societas Europaea’s P/E Ratio Compare To Its Peers?
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 (30.2) for companies in the healthcare services industry is lower than CompuGroup Medical Societas Europaea’s P/E.
CompuGroup Medical Societas Europaea’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 investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does CompuGroup Medical Societas Europaea’s Debt Impact Its P/E Ratio?
Net debt totals 14% of CompuGroup Medical Societas Europaea’s market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On CompuGroup Medical Societas Europaea’s P/E Ratio
CompuGroup Medical Societas Europaea’s P/E is 32.7 which is above average (16.9) in the DE market. Its debt levels do not imperil its balance sheet and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
But note: CompuGroup Medical Societas Europaea may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
