This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Vestas Wind Systems A/S’s (CPH:VWS) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Vestas Wind Systems’s P/E ratio is 17.42. That is equivalent to an earnings yield of about 5.7%.
How Do I Calculate Vestas Wind Systems’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 Vestas Wind Systems:
P/E of 17.42 = €65.13 (Note: this is the share price in the reporting currency, namely, EUR ) ÷ €3.74 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each DKK1 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.
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. 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.
Vestas Wind Systems’s earnings per share fell by 15% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 38%.
How Does Vestas Wind Systems’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (18) for companies in the electrical industry is roughly the same as Vestas Wind Systems’s P/E.
Its P/E ratio suggests that Vestas Wind Systems shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
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).
How Does Vestas Wind Systems’s Debt Impact Its P/E Ratio?
Since Vestas Wind Systems holds net cash of €1.6b, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Vestas Wind Systems’s P/E Ratio
Vestas Wind Systems has a P/E of 17.4. That’s around the same as the average in the DK market, which is 16.3. Although the recent drop in earnings per share would keep the market cautious, the healthy balance sheet means the company retains potential for future growth. So it’s not surprising to see it trade on a P/E roughly in line with the market.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Vestas Wind Systems 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 firstname.lastname@example.org.