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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at TCM Group A/S's (CPH:TCM) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, TCM Group's P/E ratio is 10.32. That means that at current prices, buyers pay DKK10.32 for every DKK1 in trailing yearly profits.
Check out our latest analysis for TCM Group
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 TCM Group:
P/E of 10.32 = DKK107 ÷ DKK10.37 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.'
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
In the last year, TCM Group grew EPS like Taylor Swift grew her fan base back in 2010; the 116% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 140% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
How Does TCM Group's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below TCM Group has a P/E ratio that is fairly close for the average for the consumer durables industry, which is 11.1.
That indicates that the market expects TCM Group will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I inform my view byby checking management tenure and remuneration, among other things.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.