Yahoo Finance Why DMG MORI AKTIENGESELLSCHAFT's (ETR:GIL) High P/E Ratio Isn't Necessarily A Bad Thing
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use DMG MORI AKTIENGESELLSCHAFT's (ETR:GIL) P/E ratio to inform your assessment of the investment opportunity. What is DMG MORI's P/E ratio? Well, based on the last twelve months it is 21.78. That is equivalent to an earnings yield of about 4.6%.
See 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 21.78 = €42.70 ÷ €1.96 (Based on the trailing twelve months to September 2019.)
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 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.
Does DMG MORI Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, DMG MORI has a higher P/E than the average company (16.8) in the machinery industry.
Its relatively high P/E ratio indicates that DMG MORI shareholders think it will perform better than other companies in its industry classification. 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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by DMG MORI earnings growth of 18% in the last year. And it has bolstered its earnings per share by 8.2% per year over the last five years. So one might expect an above average P/E ratio.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does DMG MORI's Debt Impact Its P/E Ratio?
The extra options and safety that comes with DMG MORI's €188m 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 DMG MORI's P/E Ratio
DMG MORI's P/E is 21.8 which is about average (21.0) in the DE market. The balance sheet is healthy, and recent EPS growth impressive, but the P/E implies some caution from the market.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than DMG MORI. 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).
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.
