The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use CES Energy Solutions Corp.'s (TSE:CEU) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, CES Energy Solutions has a P/E ratio of 14.90. That means that at current prices, buyers pay CA$14.90 for every CA$1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for CES Energy Solutions:
P/E of 14.90 = CA$1.92 ÷ CA$0.13 (Based on the trailing twelve months 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does CES Energy Solutions'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. The image below shows that CES Energy Solutions has a P/E ratio that is roughly in line with the energy services industry average (14.9).
Its P/E ratio suggests that CES Energy Solutions 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 as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
CES Energy Solutions shrunk earnings per share by 1.1% last year. And it has shrunk its earnings per share by 16% per year over the last five years. So it would be surprising to see a high P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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).
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).
So What Does CES Energy Solutions's Balance Sheet Tell Us?
Net debt totals 73% of CES Energy Solutions's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On CES Energy Solutions's P/E Ratio
CES Energy Solutions has a P/E of 14.9. That's around the same as the average in the CA market, which is 14.5. With significant debt and no EPS growth last year, the P/E suggests shareholders are expecting higher profit in the future.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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 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.