Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Georgia Healthcare Group PLC's (LON:GHG) P/E ratio could help you assess the value on offer. Based on the last twelve months, Georgia Healthcare Group's P/E ratio is 30.68. That corresponds to an earnings yield of approximately 3.3%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Georgia Healthcare Group:
P/E of 30.68 = £7.58 (Note: this is the share price in the reporting currency, namely, GEL ) ÷ £0.25 (Based on the year to June 2019.)
Is A High P/E 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. 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 Does Georgia Healthcare Group's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Georgia Healthcare Group has a higher P/E than the average (22.4) P/E for companies in the consumer retailing industry.
Georgia Healthcare Group'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.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. 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.
Georgia Healthcare Group shrunk earnings per share by 1.7% last year. And it has shrunk its earnings per share by 3.1% per year over the last three years. This growth rate might warrant a low P/E ratio. So we might expect a relatively low P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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.
How Does Georgia Healthcare Group's Debt Impact Its P/E Ratio?
Georgia Healthcare Group's net debt equates to 35% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Georgia Healthcare Group's P/E Ratio
Georgia Healthcare Group has a P/E of 30.7. That's higher than the average in its market, which is 16.0. 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.
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. 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 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.