Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Flexopack Société Anonyme Commercial and Industrial Plastics Company's (ATH:FLEXO) P/E ratio and reflect on what it tells us about the company's share price. Flexopack Société Anonyme Commercial and Industrial Plastics has a price to earnings ratio of 12.54, based on the last twelve months. That corresponds to an earnings yield of approximately 8.0%.
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 Flexopack Société Anonyme Commercial and Industrial Plastics:
P/E of 12.54 = EUR7.50 ÷ EUR0.60 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 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 Does Flexopack Société Anonyme Commercial and Industrial Plastics's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (15.4) for companies in the packaging industry is higher than Flexopack Société Anonyme Commercial and Industrial Plastics's P/E.
This suggests that market participants think Flexopack Société Anonyme Commercial and Industrial Plastics will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Flexopack Société Anonyme Commercial and Industrial Plastics saw earnings per share decrease by 8.8% last year. But over the longer term (5 years) earnings per share have increased by 16%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Flexopack Société Anonyme Commercial and Industrial Plastics's Balance Sheet Tell Us?
Flexopack Société Anonyme Commercial and Industrial Plastics has net debt worth just 2.5% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Bottom Line On Flexopack Société Anonyme Commercial and Industrial Plastics's P/E Ratio
Flexopack Société Anonyme Commercial and Industrial Plastics has a P/E of 12.5. That's below the average in the GR market, which is 17.5. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Flexopack Société Anonyme Commercial and Industrial Plastics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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