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 Österreichische Post AG’s (VIE:POST) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Österreichische Post’s P/E ratio is 14.93. That means that at current prices, buyers pay €14.93 for every €1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Österreichische Post:
P/E of 14.93 = €36.42 ÷ €2.44 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Österreichische Post saw earnings per share improve by -6.2% last year. And it has bolstered its earnings per share by 5.0% per year over the last five years.
How Does Österreichische Post’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Österreichische Post has a lower P/E than the average (18.8) P/E for companies in the logistics industry.
Its relatively low P/E ratio indicates that Österreichische Post shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Österreichische Post, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Österreichische Post’s Balance Sheet
Since Österreichische Post holds net cash of €292m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Österreichische Post’s P/E Ratio
Österreichische Post’s P/E is 14.9 which is about average (14.2) in the AT market. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth. If this occurs the current P/E might prove to signify undervaluation.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.’ So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than Österreichische Post. 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.