What Does Gabriel Holding A/S's (CPH:GABR) P/E Ratio Tell You?

Simply Wall St

Mon, Jul 15, 2019, 5:55 AM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Gabriel Holding A/S's (CPH:GABR), to help you decide if the stock is worth further research. What is Gabriel Holding's P/E ratio? Well, based on the last twelve months it is 30.72. That corresponds to an earnings yield of approximately 3.3%.

See our latest analysis for Gabriel Holding

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 Gabriel Holding:

P/E of 30.72 = DKK718 ÷ DKK23.37 (Based on the year 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 DKK1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Gabriel Holding 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. You can see in the image below that the average P/E (16.2) for companies in the luxury industry is lower than Gabriel Holding's P/E.

CPSE:GABR Price Estimation Relative to Market, July 15th 2019

Gabriel Holding's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's great to see that Gabriel Holding grew EPS by 22% in the last year.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.