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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use INTERFERIE Spólka Akcyjna's (WSE:INF) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, INTERFERIE Spólka Akcyjna has a P/E ratio of 21.89. That corresponds to an earnings yield of approximately 4.6%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for INTERFERIE Spólka Akcyjna:
P/E of 21.89 = PLN4 ÷ PLN0.18 (Based on the year 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 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. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
INTERFERIE Spólka Akcyjna's earnings per share fell by 66% in the last twelve months. But EPS is up 8.4% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 18% annually. This could justify a low P/E.
Does INTERFERIE Spólka Akcyjna Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (16.3) for companies in the hospitality industry is lower than INTERFERIE Spólka Akcyjna's P/E.
That means that the market expects INTERFERIE Spólka Akcyjna will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. 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
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. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does INTERFERIE Spólka Akcyjna's Debt Impact Its P/E Ratio?
With net cash of zł13m, INTERFERIE Spólka Akcyjna has a very strong balance sheet, which may be important for its business. Having said that, at 22% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On INTERFERIE Spólka Akcyjna's P/E Ratio
INTERFERIE Spólka Akcyjna's P/E is 21.9 which is above average (10.8) in the PL market. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: INTERFERIE Spólka Akcyjna 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 email@example.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.