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Why Terna – Rete Elettrica Nazionale Società per Azioni’s (BIT:TRN) High P/E Ratio Isn’t Necessarily A Bad Thing

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Terna – Rete Elettrica Nazionale Società per Azioni’s (BIT:TRN) P/E ratio and reflect on what it tells us about the company’s share price. Terna – Rete Elettrica Nazionale Società per Azioni has a P/E ratio of 15.9, based on the last twelve months. That corresponds to an earnings yield of approximately 6.3%.

Check out our latest analysis for Terna – Rete Elettrica Nazionale Società per Azioni

How Do You Calculate Terna – Rete Elettrica Nazionale Società per Azioni’s P/E Ratio?

The formula for price to earnings is:

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

Or for Terna – Rete Elettrica Nazionale Società per Azioni:

P/E of 15.9 = €5.51 ÷ €0.35 (Based on the trailing twelve months to September 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each €1 of company 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Terna – Rete Elettrica Nazionale Società per Azioni’s earnings per share grew by -5.7% in the last twelve months. And earnings per share have improved by 7.4% annually, over the last five years.

How Does Terna – Rete Elettrica Nazionale Società per Azioni’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Terna – Rete Elettrica Nazionale Società per Azioni has a higher P/E than the average (12.3) P/E for companies in the electric utilities industry.

BIT:TRN Price Estimation Relative to Market, March 18th 2019

Terna – Rete Elettrica Nazionale Società per Azioni’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining 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.

How Does Terna – Rete Elettrica Nazionale Società per Azioni’s Debt Impact Its P/E Ratio?

Terna – Rete Elettrica Nazionale Società per Azioni has net debt worth 69% of its market capitalization. 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 Terna – Rete Elettrica Nazionale Società per Azioni’s P/E Ratio

Terna – Rete Elettrica Nazionale Società per Azioni has a P/E of 15.9. That’s around the same as the average in the IT market, which is 15.9. While it does have considerable debt, the market seems to be reassured by recent growth in earnings per share.

Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Terna – Rete Elettrica Nazionale Società per Azioni. 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.