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Here's What Petros Petropoulos AEBE's (ATH:PETRO) P/E Is Telling Us

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Petros Petropoulos AEBE's (ATH:PETRO) P/E ratio and reflect on what it tells us about the company's share price. Petros Petropoulos AEBE has a P/E ratio of 23.22, based on the last twelve months. In other words, at today's prices, investors are paying €23.22 for every €1 in prior year profit.

Check out our latest analysis for Petros Petropoulos AEBE

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Petros Petropoulos AEBE:

P/E of 23.22 = €7.3 ÷ €0.31 (Based on the trailing twelve months to June 2019.)

Is A High P/E 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.

Does Petros Petropoulos AEBE Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Petros Petropoulos AEBE has a higher P/E than the average company (14.3) in the machinery industry.

ATSE:PETRO Price Estimation Relative to Market, August 16th 2019

Its relatively high P/E ratio indicates that Petros Petropoulos AEBE shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Petros Petropoulos AEBE shrunk earnings per share by 17% over the last year. But over the longer term (5 years) earnings per share have increased by 13%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Petros Petropoulos AEBE's Balance Sheet

Petros Petropoulos AEBE has net debt equal to 25% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Petros Petropoulos AEBE's P/E Ratio

Petros Petropoulos AEBE has a P/E of 23.2. That's higher than the average in its market, which is 16.3. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. 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.' Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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 editorial-team@simplywallst.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.