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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Deutsche Grundstücksauktionen AG's (ETR:DGR) P/E ratio could help you assess the value on offer. Deutsche Grundstücksauktionen has a P/E ratio of 18.17, based on the last twelve months. That is equivalent to an earnings yield of about 5.5%.
See our latest analysis for Deutsche Grundstücksauktionen
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Deutsche Grundstücksauktionen:
P/E of 18.17 = €18.1 ÷ €1.0 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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
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. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Deutsche Grundstücksauktionen increased earnings per share by a whopping 31% last year. And earnings per share have improved by 22% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Does Deutsche Grundstücksauktionen Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Deutsche Grundstücksauktionen has a higher P/E than the average company (13.2) in the real estate industry.
Its relatively high P/E ratio indicates that Deutsche Grundstücksauktionen 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 investors should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.