What Does Energiekontor AG's (FRA:EKT) P/E Ratio Tell You?

Simply Wall St

Mon, Jul 15, 2019, 2:14 AM

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 Energiekontor AG's (FRA:EKT) P/E ratio to inform your assessment of the investment opportunity. Energiekontor has a price to earnings ratio of 38.39, based on the last twelve months. That means that at current prices, buyers pay €38.39 for every €1 in trailing yearly profits.

View our latest analysis for Energiekontor

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Energiekontor:

P/E of 38.39 = €17.6 ÷ €0.46 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

Does Energiekontor 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. The image below shows that Energiekontor has a P/E ratio that is roughly in line with the electrical industry average (36.1).

DB:EKT Price Estimation Relative to Market, July 15th 2019

That indicates that the market expects Energiekontor will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Energiekontor's earnings per share fell by 44% in the last twelve months. And EPS is down 13% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.

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. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.