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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Compagnie Financière Tradition SA's (VTX:CFT) P/E ratio and reflect on what it tells us about the company's share price. Compagnie Financière Tradition has a price to earnings ratio of 14.7, based on the last twelve months. In other words, at today's prices, investors are paying CHF14.7 for every CHF1 in prior year profit.
See our latest analysis for Compagnie Financière Tradition
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Compagnie Financière Tradition:
P/E of 14.7 = CHF109.5 ÷ CHF7.45 (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. 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.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Compagnie Financière Tradition increased earnings per share by 7.5% last year. And earnings per share have improved by 26% annually, over the last five years.
How Does Compagnie Financière Tradition's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (14.7) for companies in the capital markets industry is roughly the same as Compagnie Financière Tradition's P/E.
Compagnie Financière Tradition's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Compagnie Financière Tradition actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).