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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Netcompany Group A/S's (CPH:NETC), to help you decide if the stock is worth further research. Based on the last twelve months, Netcompany Group's P/E ratio is 64.98. That corresponds to an earnings yield of approximately 1.5%.
See our latest analysis for Netcompany Group
How Do You Calculate Netcompany Group's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Netcompany Group:
P/E of 64.98 = DKK237 ÷ DKK3.65 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each DKK1 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
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Netcompany Group increased earnings per share by an impressive 25% over the last twelve months. In contrast, EPS has decreased by 51%, annually, over 5 years.
How Does Netcompany Group's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Netcompany Group has a higher P/E than the average company (29.2) in the software industry.
Its relatively high P/E ratio indicates that Netcompany Group shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.