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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 show how you can use Mycronic AB (publ)'s (STO:MYCR) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Mycronic's P/E ratio is 11.85. That means that at current prices, buyers pay SEK11.85 for every SEK1 in trailing yearly profits.
Check out our latest analysis for Mycronic
How Do I Calculate Mycronic's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Mycronic:
P/E of 11.85 = SEK116.3 ÷ SEK9.81 (Based on the year to March 2019.)
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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Mycronic Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Mycronic has a lower P/E than the average (17.8) in the electronic industry classification.
Mycronic's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Mycronic, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Mycronic increased earnings per share by a whopping 47% last year. And its annual EPS growth rate over 5 years is 108%. With that performance, I would expect it to have an above average P/E ratio.
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. 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).