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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Powerbridge Technologies Co., Ltd.'s (NASDAQ:PBTS) P/E ratio to inform your assessment of the investment opportunity. Powerbridge Technologies has a P/E ratio of 15.99, based on the last twelve months. That corresponds to an earnings yield of approximately 6.3%.
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 Powerbridge Technologies:
P/E of 15.99 = $3.58 ÷ $0.22 (Based on the year 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. 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
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Powerbridge Technologies's earnings per share fell by 61% in the last twelve months. And EPS is down 15% a year, over the last 5 years. This could justify a pessimistic P/E.
Does Powerbridge Technologies 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. The image below shows that Powerbridge Technologies has a lower P/E than the average (51.5) P/E for companies in the software industry.
Its relatively low P/E ratio indicates that Powerbridge Technologies shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
How Does Powerbridge Technologies's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Powerbridge Technologies's US$2.8m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Powerbridge Technologies's P/E Ratio
Powerbridge Technologies has a P/E of 16. That's below the average in the US market, which is 18.1. Falling earnings per share are likely to be keeping potential buyers away, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation.
Investors should be looking to buy stocks that the market is wrong about. 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.
But note: Powerbridge Technologies 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.