Does All for One Group AG's (ETR:A1OS) P/E Ratio Signal A Buying Opportunity?

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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 All for One Group AG's (ETR:A1OS) P/E ratio and reflect on what it tells us about the company's share price. All for One Group has a P/E ratio of 13.09, based on the last twelve months. That corresponds to an earnings yield of approximately 7.6%.

See our latest analysis for All for One Group

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for All for One Group:

P/E of 13.09 = €43.8 ÷ €3.34 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 All for One Group's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see All for One Group has a lower P/E than the average (25.5) in the it industry classification.

XTRA:A1OS Price Estimation Relative to Market, July 19th 2019
XTRA:A1OS Price Estimation Relative to Market, July 19th 2019

This suggests that market participants think All for One Group will underperform other companies in its industry. Since the market seems unimpressed with All for One Group, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or 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. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, All for One Group grew EPS by a whopping 28% in the last year. And earnings per share have improved by 20% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

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.

Is Debt Impacting All for One Group's P/E?

All for One Group has net debt worth just 2.8% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On All for One Group's P/E Ratio

All for One Group trades on a P/E ratio of 13.1, which is below the DE market average of 19.7. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: All for One Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.