The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Deutsche Telekom AG’s (FRA:DTE) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Deutsche Telekom’s P/E ratio is 32.22. That means that at current prices, buyers pay €32.22 for every €1 in trailing yearly profits.
How Do You Calculate Deutsche Telekom’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Deutsche Telekom:
P/E of 32.22 = €14.72 ÷ €0.46 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. 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.
Deutsche Telekom saw earnings per share decrease by 38% last year. But over the longer term (5 years) earnings per share have increased by 3.9%. And over the longer term (3 years) earnings per share have decreased 22% annually. This growth rate might warrant a low P/E ratio.
How Does Deutsche Telekom’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (23.2) for companies in the telecom industry is lower than Deutsche Telekom’s P/E.
That means that the market expects Deutsche Telekom will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors 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
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
Is Debt Impacting Deutsche Telekom’s P/E?
Deutsche Telekom has net debt worth 84% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Deutsche Telekom’s P/E Ratio
Deutsche Telekom trades on a P/E ratio of 32.2, which is above the DE market average of 18.7. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Deutsche Telekom 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).
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 email@example.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.