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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Eltrak S.A.'s (ATH:ELTRK) P/E ratio and reflect on what it tells us about the company's share price. Eltrak has a price to earnings ratio of 20.69, based on the last twelve months. That means that at current prices, buyers pay €20.69 for every €1 in trailing yearly profits.

View our latest analysis for Eltrak

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Eltrak:

P/E of 20.69 = €2.64 ÷ €0.13 (Based on the year to December 2018.)

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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about 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.

Eltrak's earnings per share fell by 64% in the last twelve months. But it has grown its earnings per share by 19% per year over the last five years. And EPS is down 14% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

How Does Eltrak's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (14.1) for companies in the trade distributors industry is lower than Eltrak's P/E.

Eltrak's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Eltrak's Balance Sheet

Eltrak's net debt equates to 42% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Eltrak's P/E Ratio

Eltrak has a P/E of 20.7. That's higher than the average in the GR market, which is 16. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Eltrak. So you may wish to see this free collection of other companies that have grown earnings strongly.

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 editorial-team@simplywallst.com. 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.