This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Evolution Gaming Group AB (publ)’s (STO:EVO) P/E ratio and reflect on what it tells us about the company’s share price. Evolution Gaming Group has a P/E ratio of 25.86, based on the last twelve months. In other words, at today’s prices, investors are paying SEK25.86 for every SEK1 in prior year profit.
How Do I Calculate Evolution Gaming Group’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Evolution Gaming Group:
P/E of 25.86 = €54.61 (Note: this is the share price in the reporting currency, namely, EUR ) ÷ €2.11 (Based on the trailing twelve months to September 2018.)
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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. 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.
It’s nice to see that Evolution Gaming Group grew EPS by a stonking 43% in the last year. And it has bolstered its earnings per share by 45% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Evolution Gaming Group’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Evolution Gaming Group has a higher P/E than the average company (17.1) in the hospitality industry.
That means that the market expects Evolution Gaming Group will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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 taking on debt (or spending its remaining cash).
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 Evolution Gaming Group’s Debt Impact Its P/E Ratio?
Since Evolution Gaming Group holds net cash of €57m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Evolution Gaming Group’s P/E Ratio
Evolution Gaming Group trades on a P/E ratio of 25.9, which is above the SE market average of 15.2. With cash in the bank the company has plenty of growth options — and it is already on the right track. So it does not seem strange that the P/E is above average.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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 Evolution Gaming Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.