Yahoo Finance Do You Like Peugeot S.A. (EPA:UG) At This P/E Ratio?
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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Peugeot S.A.'s (EPA:UG) P/E ratio could help you assess the value on offer. Peugeot has a P/E ratio of 6.85, based on the last twelve months. That means that at current prices, buyers pay €6.85 for every €1 in trailing yearly profits.
Check out our latest analysis for Peugeot
How Do You Calculate Peugeot's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Peugeot:
P/E of 6.85 = €21.68 ÷ €3.16 (Based on the year to December 2018.)
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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Peugeot increased earnings per share by a whopping 46% last year. And its annual EPS growth rate over 3 years is 40%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Does Peugeot Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Peugeot has a lower P/E than the average (7.5) P/E for companies in the auto industry.
Its relatively low P/E ratio indicates that Peugeot shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Peugeot, it's quite possible it could surprise on the upside. 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
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Peugeot's Balance Sheet Tell Us?
Peugeot has net cash of €8.6b. This is fairly high at 44% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On Peugeot's P/E Ratio
Peugeot's P/E is 6.9 which is below average (17.9) in the FR market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can taker closer look at the fundamentals, here.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 Peugeot. 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).
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.
