Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Staatl. Mineralbrunnen AG's (MUN:SLB) P/E ratio and reflect on what it tells us about the company's share price. What is Staatl. Mineralbrunnen's P/E ratio? Well, based on the last twelve months it is 62.59. That is equivalent to an earnings yield of about 1.6%.
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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 Staatl. Mineralbrunnen:
P/E of 62.59 = €126 ÷ €2.01 (Based on the year to December 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Staatl. Mineralbrunnen's earnings per share were pretty steady over the last year. But EPS is up 1.2% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 14% annually. So it would be surprising to see a high P/E.
Does Staatl. Mineralbrunnen Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Staatl. Mineralbrunnen has a higher P/E than the average (23.3) P/E for companies in the beverage industry.
Staatl. Mineralbrunnen's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting Staatl. Mineralbrunnen's P/E?
Net debt totals just 0.3% of Staatl. Mineralbrunnen's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Verdict On Staatl. Mineralbrunnen's P/E Ratio
Staatl. Mineralbrunnen's P/E is 62.6 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts, shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Staatl. Mineralbrunnen. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org. 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.