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 NÜRNBERGER Beteiligungs-AG's (ETR:NBG6) P/E ratio could help you assess the value on offer. NÜRNBERGER Beteiligungs-AG has a P/E ratio of 13.22, based on the last twelve months. That is equivalent to an earnings yield of about 7.6%.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for NÜRNBERGER Beteiligungs-AG:
P/E of 13.22 = €67.50 ÷ €5.10 (Based on the trailing twelve months to June 2019.)
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 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.
How Does NÜRNBERGER Beteiligungs-AG'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, NÜRNBERGER Beteiligungs-AG has a higher P/E than the average company (11.9) in the insurance industry.
NÜRNBERGER Beteiligungs-AG's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
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 even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
NÜRNBERGER Beteiligungs-AG's earnings per share fell by 37% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 9.5% annually. This could justify a pessimistic P/E.
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. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
NÜRNBERGER Beteiligungs-AG's Balance Sheet
With net cash of €240m, NÜRNBERGER Beteiligungs-AG has a very strong balance sheet, which may be important for its business. Having said that, at 31% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On NÜRNBERGER Beteiligungs-AG's P/E Ratio
NÜRNBERGER Beteiligungs-AG has a P/E of 13.2. That's below the average in the DE market, which is 19.4. The recent drop in earnings per share would make investors cautious, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: NÜRNBERGER Beteiligungs-AG 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).
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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.