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Why Industria de Diseño Textil SA’s (BME:ITX) 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). To keep it practical, we’ll show how Industria de Diseño Textil SA’s (BME:ITX) P/E ratio could help you assess the value on offer. Industria de Diseño Textil has a P/E ratio of 23.87, based on the last twelve months. That is equivalent to an earnings yield of about 4.2%.

View our latest analysis for Industria de Diseño Textil

How Do You Calculate Industria de Diseño Textil’s P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Industria de Diseño Textil:

P/E of 23.87 = €26.15 ÷ €1.1 (Based on the trailing twelve months to July 2018.)

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 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Industria de Diseño Textil’s earnings per share grew by -4.4% in the last twelve months. And it has bolstered its earnings per share by 8.8% per year over the last five years.

How Does Industria de Diseño Textil’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Industria de Diseño Textil has a higher P/E than the average company (12.4) in the specialty retail industry.

BME:ITX PE PEG Gauge November 13th 18

Industria de Diseño Textil’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Is Debt Impacting Industria de Diseño Textil’s P/E?

Since Industria de Diseño Textil holds net cash of €5.9b, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Industria de Diseño Textil’s P/E Ratio

Industria de Diseño Textil’s P/E is 23.9 which is above average (17) in the ES market. Recent earnings growth wasn’t bad. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.

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. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.