Is TAG Immobilien AG's (FRA:TEG) P/E Ratio Really That Good?
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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at TAG Immobilien AG's (FRA:TEG) P/E ratio and reflect on what it tells us about the company's share price. What is TAG Immobilien's P/E ratio? Well, based on the last twelve months it is 6.16. That corresponds to an earnings yield of approximately 16%.
View our latest analysis for TAG Immobilien
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for TAG Immobilien:
P/E of 6.16 = €20.5 ÷ €3.33 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.
In the last year, TAG Immobilien grew EPS like Taylor Swift grew her fan base back in 2010; the 54% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 66% per year. So I'd be surprised if the P/E ratio was not above average.
How Does TAG Immobilien's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see TAG Immobilien has a lower P/E than the average (16.1) in the real estate industry classification.
This suggests that market participants think TAG Immobilien will underperform other companies in its industry. Since the market seems unimpressed with TAG Immobilien, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
How Does TAG Immobilien's Debt Impact Its P/E Ratio?
Net debt totals 76% of TAG Immobilien's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On TAG Immobilien's P/E Ratio
TAG Immobilien's P/E is 6.2 which is below average (19.8) in the DE market. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: TAG Immobilien may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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.
