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Why Przetwórstwo Tworzyw Sztucznych Plast-Box S.A.'s (WSE:PLX) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Przetwórstwo Tworzyw Sztucznych Plast-Box S.A.'s (WSE:PLX) P/E ratio could help you assess the value on offer. What is Przetwórstwo Tworzyw Sztucznych Plast-Box's P/E ratio? Well, based on the last twelve months it is 38.09. That is equivalent to an earnings yield of about 2.6%.

View our latest analysis for Przetwórstwo Tworzyw Sztucznych Plast-Box

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Przetwórstwo Tworzyw Sztucznych Plast-Box:

P/E of 38.09 = PLN1.75 ÷ PLN0.046 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each PLN1 of company earnings. 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. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Przetwórstwo Tworzyw Sztucznych Plast-Box's earnings per share fell by 66% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 22% annually. This could justify a pessimistic P/E.

Does Przetwórstwo Tworzyw Sztucznych Plast-Box Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Przetwórstwo Tworzyw Sztucznych Plast-Box has a higher P/E than the average company (17.5) in the packaging industry.

WSE:PLX Price Estimation Relative to Market, May 31st 2019

That means that the market expects Przetwórstwo Tworzyw Sztucznych Plast-Box will outperform other companies in its industry. 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.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 Przetwórstwo Tworzyw Sztucznych Plast-Box's Balance Sheet Tell Us?

Przetwórstwo Tworzyw Sztucznych Plast-Box's net debt is 78% of its 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 Bottom Line On Przetwórstwo Tworzyw Sztucznych Plast-Box's P/E Ratio

Przetwórstwo Tworzyw Sztucznych Plast-Box trades on a P/E ratio of 38.1, which is multiples above the PL market average of 10.6. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.

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.' Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Przetwórstwo Tworzyw Sztucznych Plast-Box. 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 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.