Is KPS AG's (ETR:KSC) P/E Ratio Really That Good?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how KPS AG's ( ETR:KSC) P/E ratio could help you assess the value on offer. KPS has a price to earnings ratio of 21.18, based on the last twelve months. That corresponds to an earnings yield of approximately 4.7%.
Check out our latest analysis for KPS
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for KPS:
P/E of 21.18 = €7.03 ÷ €0.33 (Based on the trailing twelve months to June 2019.)
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.
Does KPS Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that KPS has a lower P/E than the average (26.2) P/E for companies in the it industry.
Its relatively low P/E ratio indicates that KPS shareholders think it will struggle to do as well as other companies in its industry classification.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others - and that may encourage shareholders to sell.
KPS saw earnings per share decrease by 8.3% last year. And over the longer term (5 years) earnings per share have decreased 7.4% annually. So it would be surprising to see a high P/E. The company could impress by growing EPS, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does KPS's Debt Impact Its P/E Ratio?
Net debt totals just 2.7% of KPS's market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On KPS's P/E Ratio
KPS's P/E is 21.2 which is above average (19.2) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth - so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than KPS. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at [email protected] This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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