The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Atvexa AB (publ)'s (STO:ATVEXA B) P/E ratio and reflect on what it tells us about the company's share price. What is Atvexa's P/E ratio? Well, based on the last twelve months it is 20.09. That is equivalent to an earnings yield of about 5.0%.
View our latest analysis for Atvexa
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Atvexa:
P/E of 20.09 = SEK82.50 ÷ SEK4.11 (Based on the trailing twelve months to August 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 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 Does Atvexa'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 Atvexa has a higher P/E than the average (15.5) P/E for companies in the consumer services industry.
Its relatively high P/E ratio indicates that Atvexa shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Most would be impressed by Atvexa earnings growth of 22% in the last year. And earnings per share have improved by 24% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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).