This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Athens Medical Center S.A.'s (ATH:IATR) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Athens Medical Center has a P/E ratio of 12.53. That means that at current prices, buyers pay €12.53 for every €1 in trailing yearly profits.
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See our latest analysis for Athens Medical Center
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Athens Medical Center:
P/E of 12.53 = €1.56 ÷ €0.12 (Based on the year to December 2018.)
Is A High P/E 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
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. 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.
Athens Medical Center's 310% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
Does Athens Medical Center 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. If you look at the image below, you can see Athens Medical Center has a lower P/E than the average (20.7) in the healthcare industry classification.
This suggests that market participants think Athens Medical Center will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.