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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Robertet SA's (EPA:RBT) P/E ratio to inform your assessment of the investment opportunity. What is Robertet's P/E ratio? Well, based on the last twelve months it is 27.71. In other words, at today's prices, investors are paying €27.71 for every €1 in prior year profit.
See our latest analysis for Robertet
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Robertet:
P/E of 27.71 = €621 ÷ €22.41 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company 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.'
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Robertet's earnings per share grew by -6.4% in the last twelve months. And it has bolstered its earnings per share by 15% per year over the last five years.
Does Robertet Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Robertet has a higher P/E than the average company (21.7) in the chemicals industry.
Its relatively high P/E ratio indicates that Robertet shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors 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
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.