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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how M1 Kliniken AG's (FRA:M12) P/E ratio could help you assess the value on offer. M1 Kliniken has a P/E ratio of 33.43, based on the last twelve months. In other words, at today's prices, investors are paying €33.43 for every €1 in prior year profit.
See our latest analysis for M1 Kliniken
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for M1 Kliniken:
P/E of 33.43 = €13.15 ÷ €0.39 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 M1 Kliniken Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that M1 Kliniken has a P/E ratio that is roughly in line with the healthcare industry average (33.4).
M1 Kliniken's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
M1 Kliniken's earnings per share grew by -4.6% in the last twelve months. And earnings per share have improved by 122% annually, over the last five years. Unfortunately, earnings per share are down 3.8% a year, over 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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.