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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Floridienne S.A.'s (EBR:FLOB) P/E ratio to inform your assessment of the investment opportunity. What is Floridienne's P/E ratio? Well, based on the last twelve months it is 21.73. In other words, at today's prices, investors are paying €21.73 for every €1 in prior year profit.
View our latest analysis for Floridienne
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Floridienne:
P/E of 21.73 = €184 ÷ €8.47 (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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Floridienne earnings growth of 20% in the last year. And its annual EPS growth rate over 3 years is 12%. So one might expect an above average P/E ratio.
How Does Floridienne's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Floridienne has a lower P/E than the average (25.3) P/E for companies in the food industry.
This suggests that market participants think Floridienne will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.