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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how SferaNet Spólka Akcyjna's (WSE:SFN) P/E ratio could help you assess the value on offer. What is SferaNet Spólka Akcyjna's P/E ratio? Well, based on the last twelve months it is 12.94. That means that at current prices, buyers pay PLN12.94 for every PLN1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for SferaNet Spólka Akcyjna:
P/E of 12.94 = PLN0.82 ÷ PLN0.063 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, SferaNet Spólka Akcyjna grew EPS by a whopping 49% in the last year. And it has bolstered its earnings per share by 3.2% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
How Does SferaNet Spólka Akcyjna's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see SferaNet Spólka Akcyjna has a lower P/E than the average (29.1) in the telecom industry classification.
This suggests that market participants think SferaNet Spólka Akcyjna will underperform other companies in its industry. Since the market seems unimpressed with SferaNet Spólka Akcyjna, it's quite possible it could surprise on the upside. 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. 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.
Is Debt Impacting SferaNet Spólka Akcyjna's P/E?
SferaNet Spólka Akcyjna has net cash of zł249k. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On SferaNet Spólka Akcyjna's P/E Ratio
SferaNet Spólka Akcyjna has a P/E of 12.9. That's higher than the average in the PL market, which is 10.7. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect SferaNet Spólka Akcyjna to have a high P/E ratio.
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.' We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than SferaNet Spólka Akcyjna. If you want a selection of possible winners, check out this freelist of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 email@example.com. 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.