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 Plastiques du Val de Loire's (EPA:PVL) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Plastiques du Val de Loire has a P/E ratio of 5.39. That corresponds to an earnings yield of approximately 18.5%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Plastiques du Val de Loire:
P/E of 5.39 = EUR7.06 ÷ EUR1.31 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Plastiques du Val de Loire 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. We can see in the image below that the average P/E (21.4) for companies in the chemicals industry is higher than Plastiques du Val de Loire's P/E.
This suggests that market participants think Plastiques du Val de Loire will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Plastiques du Val de Loire shrunk earnings per share by 37% over the last year. But EPS is up 20% over the last 5 years. And EPS is down 6.5% a year, over the last 3 years. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.
Plastiques du Val de Loire's Balance Sheet
Net debt totals a substantial 130% of Plastiques du Val de Loire's market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Verdict On Plastiques du Val de Loire's P/E Ratio
Plastiques du Val de Loire has a P/E of 5.4. That's below the average in the FR market, which is 18.5. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Plastiques du Val de Loire. 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 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.
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