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Should We Worry About ORPEA Société Anonyme's (EPA:ORP) P/E Ratio?

Simply Wall St
·4 min read

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at ORPEA Société Anonyme's (EPA:ORP) P/E ratio and reflect on what it tells us about the company's share price. ORPEA Société Anonyme has a P/E ratio of 24.03, based on the last twelve months. That means that at current prices, buyers pay €24.03 for every €1 in trailing yearly profits.

View our latest analysis for ORPEA Société Anonyme

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for ORPEA Société Anonyme:

P/E of 24.03 = €84.600 ÷ €3.521 (Based on the year to June 2019.)

(Note: the above calculation results may not be precise due to rounding.)

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. 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.

Does ORPEA Société Anonyme Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below ORPEA Société Anonyme has a P/E ratio that is fairly close for the average for the healthcare industry, which is 24.0.

ENXTPA:ORP Price Estimation Relative to Market, March 16th 2020
ENXTPA:ORP Price Estimation Relative to Market, March 16th 2020

ORPEA Société Anonyme's P/E tells us that market participants think its prospects are roughly in line with its industry. So if ORPEA Société Anonyme actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

ORPEA Société Anonyme's earnings per share fell by 6.4% in the last twelve months. But EPS is up 13% over the last 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 ORPEA Société Anonyme's Balance Sheet Tell Us?

Net debt totals 83% of ORPEA Société Anonyme's market cap. 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 ORPEA Société Anonyme's P/E Ratio

ORPEA Société Anonyme's P/E is 24.0 which is above average (14.1) in its market. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future.

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.

You might be able to find a better buy than ORPEA Société Anonyme. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.

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. Thank you for reading.