The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Peach Property Group AG’s (VTX:PEAN) P/E ratio and reflect on what it tells us about the company’s share price. Peach Property Group has a price to earnings ratio of 3.16, based on the last twelve months. That is equivalent to an earnings yield of about 32%.
See our latest analysis for Peach Property Group
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 Peach Property Group:
P/E of 3.16 = CHF27.9 ÷ CHF8.84 (Based on the year to June 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 of company earnings. 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Peach Property Group grew EPS by a whopping 112% in the last year. And it has bolstered its earnings per share by 66% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Peach Property Group’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Peach Property Group has a lower P/E than the average (14.6) in the real estate industry classification.
This suggests that market participants think Peach Property Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.