Yahoo Finance Should You Be Tempted To Sell DMG MORI AKTIENGESELLSCHAFT (FRA:GIL) Because Of Its P/E Ratio?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at DMG MORI AKTIENGESELLSCHAFT's (FRA:GIL) P/E ratio and reflect on what it tells us about the company's share price. What is DMG MORI's P/E ratio? Well, based on the last twelve months it is 21.51. That means that at current prices, buyers pay €21.51 for every €1 in trailing yearly profits.
View our latest analysis for DMG MORI
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for DMG MORI:
P/E of 21.51 = €42.2 ÷ €1.96 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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 Does DMG MORI's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (13.5) for companies in the machinery industry is lower than DMG MORI's P/E.
That means that the market expects DMG MORI will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and 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. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
DMG MORI increased earnings per share by an impressive 24% over the last twelve months. And earnings per share have improved by 8.3% annually, over the last five years. So one might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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).
How Does DMG MORI's Debt Impact Its P/E Ratio?
Since DMG MORI holds net cash of €159m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On DMG MORI's P/E Ratio
DMG MORI's P/E is 21.5 which is about average (20) in the DE market. With a strong balance sheet combined with recent growth, the P/E implies the market is quite pessimistic.
Investors have an opportunity when market expectations about a stock are wrong. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
