The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Etn. Fr. Colruyt NV's (EBR:COLR) P/E ratio could help you assess the value on offer. Etn. Fr. Colruyt has a P/E ratio of 17.31, based on the last twelve months. In other words, at today's prices, investors are paying €17.31 for every €1 in prior year profit.
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 Etn. Fr. Colruyt:
P/E of 17.31 = €46.48 ÷ €2.68 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Etn. Fr. Colruyt Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Etn. Fr. Colruyt has a lower P/E than the average (19.3) in the consumer retailing industry classification.
Etn. Fr. Colruyt's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Etn. Fr. Colruyt saw earnings per share decrease by 6.4% last year. But EPS is up 3.1% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
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).
Is Debt Impacting Etn. Fr. Colruyt's P/E?
The extra options and safety that comes with Etn. Fr. Colruyt's €289m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Etn. Fr. Colruyt's P/E Ratio
Etn. Fr. Colruyt has a P/E of 17.3. That's around the same as the average in the BE market, which is 16.9. Although the recent drop in earnings per share would keep the market cautious, the net cash position means it's not surprising that expectations put the company roughly in line with the market average P/E.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Etn. Fr. Colruyt 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).
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.
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.