This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Microwave Vision S.A.'s (EPA:ALMIC) P/E ratio and reflect on what it tells us about the company's share price. Microwave Vision has a price to earnings ratio of 18.27, based on the last twelve months. That means that at current prices, buyers pay €18.27 for every €1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Microwave Vision:
P/E of 18.27 = €13.85 ÷ €0.76 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.
Does Microwave Vision 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. You can see in the image below that the average P/E (18.0) for companies in the communications industry is roughly the same as Microwave Vision's P/E.
Its P/E ratio suggests that Microwave Vision 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. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
In the last year, Microwave Vision grew EPS like Taylor Swift grew her fan base back in 2010; the 255% gain was both fast and well deserved. Unfortunately, earnings per share are down 9.5% a year, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
So What Does Microwave Vision's Balance Sheet Tell Us?
With net cash of €10.0m, Microwave Vision has a very strong balance sheet, which may be important for its business. Having said that, at 12% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Microwave Vision's P/E Ratio
Microwave Vision has a P/E of 18.3. That's around the same as the average in the FR market, which is 17.3. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Microwave Vision to have a higher P/E ratio. All the more so, since analysts expect further profit growth. Click here to research this potential opportunity..
Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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.
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.