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 Groupe CRIT SA's (EPA:CEN) P/E ratio to inform your assessment of the investment opportunity. What is Groupe CRIT's P/E ratio? Well, based on the last twelve months it is 9.74. That corresponds to an earnings yield of approximately 10.3%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Groupe CRIT:
P/E of 9.74 = EUR73.00 ÷ EUR7.50 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each EUR1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
Does Groupe CRIT Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Groupe CRIT has a lower P/E than the average (17.6) in the professional services industry classification.
Its relatively low P/E ratio indicates that Groupe CRIT shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Groupe CRIT, it's quite possible it could surprise on the upside. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Groupe CRIT's earnings per share fell by 10% in the last twelve months. But EPS is up 11% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Groupe CRIT's Debt Impact Its P/E Ratio?
Groupe CRIT has net cash of €70m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Groupe CRIT's P/E Ratio
Groupe CRIT trades on a P/E ratio of 9.7, which is below the FR market average of 18.6. Falling earnings per share are likely to be keeping potential buyers away, 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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.
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.