Don't Sell Stadlauer Malzfabrik Aktiengesellschaft (VIE:STM) Before You Read This

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Stadlauer Malzfabrik Aktiengesellschaft's (VIE:STM) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Stadlauer Malzfabrik has a P/E ratio of 22.33. In other words, at today's prices, investors are paying €22.33 for every €1 in prior year profit.

View our latest analysis for Stadlauer Malzfabrik

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Stadlauer Malzfabrik:

P/E of 22.33 = EUR55.00 ÷ EUR2.46 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each EUR1 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.

Does Stadlauer Malzfabrik Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Stadlauer Malzfabrik has a higher P/E than the average company (19.6) in the real estate industry.

Stadlauer Malzfabrik'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 delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Stadlauer Malzfabrik's earnings per share fell by 30% in the last twelve months. But it has grown its earnings per share by 2.0% per year over the last five years.

Remember: P/E Ratios Don't Consider The Balance Sheet

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.

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 Stadlauer Malzfabrik's P/E?

Stadlauer Malzfabrik has net cash of €2.8m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Stadlauer Malzfabrik's P/E Ratio

Stadlauer Malzfabrik's P/E is 22.3 which is above average (14.8) in its market. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Stadlauer Malzfabrik. 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).

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.

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. Thank you for reading.