In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at IVE Group Limited’s (ASX:IGL) P/E ratio and reflect on what it tells us about the company’s share price. IVE Group has a price to earnings ratio of 11.87, based on the last twelve months. That means that at current prices, buyers pay A$11.87 for every A$1 in trailing yearly profits.
View our latest analysis for IVE Group
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 IVE Group:
P/E of 11.87 = A$2.25 ÷ A$0.19 (Based on the trailing twelve months 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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.
IVE Group’s earnings per share fell by 1.5% in the last twelve months. But EPS is up 28% over the last 5 years.
How Does IVE Group’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that IVE Group has a P/E ratio that is roughly in line with the media industry average (12).
Its P/E ratio suggests that IVE Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if IVE Group actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).