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Should You Be Tempted To Sell Koninklijke Vopak N.V. (AMS:VPK) Because Of Its P/E Ratio?

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Koninklijke Vopak N.V.'s (AMS:VPK), to help you decide if the stock is worth further research. Koninklijke Vopak has a price to earnings ratio of 17.99, based on the last twelve months. That is equivalent to an earnings yield of about 5.6%.

View our latest analysis for Koninklijke Vopak

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Koninklijke Vopak:

P/E of 17.99 = €43.33 ÷ €2.41 (Based on the year to June 2019.)

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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Koninklijke Vopak's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (8.8) for companies in the oil and gas industry is lower than Koninklijke Vopak's P/E.

ENXTAM:VPK Price Estimation Relative to Market, August 19th 2019

Its relatively high P/E ratio indicates that Koninklijke Vopak shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Koninklijke Vopak increased earnings per share by a whopping 37% last year. And earnings per share have improved by 2.1% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 16% a year, over 3 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.

So What Does Koninklijke Vopak's Balance Sheet Tell Us?

Net debt is 37% of Koninklijke Vopak's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Koninklijke Vopak's P/E Ratio

Koninklijke Vopak trades on a P/E ratio of 18, which is fairly close to the NL market average of 18.5. With only modest debt levels, and strong earnings growth, the market seems to doubt that the growth can be maintained. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can taker closer look at the fundamentals, here.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

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 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.