Yahoo Finance A Rising Share Price Has Us Looking Closely At EnBW Energie Baden-Württemberg AG's (ETR:EBK) P/E Ratio
EnBW Energie Baden-Württemberg (ETR:EBK) shareholders are no doubt pleased to see that the share price has had a great month, posting a 42% gain, recovering from prior weakness. That brought the twelve month gain to a very sharp 61%.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
See our latest analysis for EnBW Energie Baden-Württemberg
Does EnBW Energie Baden-Württemberg Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 18.81 that there is some investor optimism about EnBW Energie Baden-Württemberg. You can see in the image below that the average P/E (10.7) for companies in the electric utilities industry is lower than EnBW Energie Baden-Württemberg's P/E.
EnBW Energie Baden-Württemberg's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, EnBW Energie Baden-Württemberg grew EPS like Taylor Swift grew her fan base back in 2010; the 120% gain was both fast and well deserved.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 EnBW Energie Baden-Württemberg's Balance Sheet Tell Us?
EnBW Energie Baden-Württemberg has net debt equal to 46% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On EnBW Energie Baden-Württemberg's P/E Ratio
EnBW Energie Baden-Württemberg has a P/E of 18.8. That's higher than the average in its market, which is 16.7. While the company does use modest debt, its recent earnings growth is superb. So to be frank we are not surprised it has a high P/E ratio. What is very clear is that the market has become significantly more optimistic about EnBW Energie Baden-Württemberg over the last month, with the P/E ratio rising from 13.3 back then to 18.8 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than EnBW Energie Baden-Württemberg. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
