Here's What Autogrill S.p.A.'s (BIT:AGL) P/E Is Telling Us

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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Autogrill S.p.A.'s (BIT:AGL) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Autogrill has a P/E ratio of 34.12. That means that at current prices, buyers pay €34.12 for every €1 in trailing yearly profits.

See our latest analysis for Autogrill

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 Autogrill:

P/E of 34.12 = €9.22 ÷ €0.27 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

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

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Autogrill's earnings per share fell by 29% in the last twelve months. But it has grown its earnings per share by 2.1% per year over the last three years.

How Does Autogrill's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Autogrill has a higher P/E than the average (22.7) P/E for companies in the hospitality industry.

BIT:AGL Price Estimation Relative to Market, July 1st 2019

Its relatively high P/E ratio indicates that Autogrill shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does Autogrill's Balance Sheet Tell Us?

Autogrill has net debt equal to 31% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Autogrill's P/E Ratio

Autogrill's P/E is 34.1 which is above average (15.8) in the IT market. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors should be looking to buy stocks that the market is wrong about. 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: Autogrill 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 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.