This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at DATA MODUL Aktiengesellschaft, Produktion und Vertrieb von elektronischen Systemen's (ETR:DAM) P/E ratio and reflect on what it tells us about the company's share price. DATA MODUL Produktion und Vertrieb von elektronischen Systemen has a P/E ratio of 18.67, based on the last twelve months. That means that at current prices, buyers pay €18.67 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 = Share Price ÷ Earnings per Share (EPS)
Or for DATA MODUL Produktion und Vertrieb von elektronischen Systemen:
P/E of 18.67 = EUR50.00 ÷ EUR2.68 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 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.
Does DATA MODUL Produktion und Vertrieb von elektronischen Systemen Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that DATA MODUL Produktion und Vertrieb von elektronischen Systemen has a lower P/E than the average (30.0) P/E for companies in the electronic industry.
DATA MODUL Produktion und Vertrieb von elektronischen Systemen's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
DATA MODUL Produktion und Vertrieb von elektronischen Systemen shrunk earnings per share by 26% over the last year. But over the longer term (5 years) earnings per share have increased by 6.1%.
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. 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.
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.
DATA MODUL Produktion und Vertrieb von elektronischen Systemen's Balance Sheet
Since DATA MODUL Produktion und Vertrieb von elektronischen Systemen holds net cash of €15m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On DATA MODUL Produktion und Vertrieb von elektronischen Systemen's P/E Ratio
DATA MODUL Produktion und Vertrieb von elektronischen Systemen's P/E is 18.7 which is below average (20.8) in the DE market. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than DATA MODUL Produktion und Vertrieb von elektronischen Systemen. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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. Thank you for reading.