This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Terna Energy Societe Anonyme Commercial Technical Company’s (ATH:TENERGY) P/E ratio could help you assess the value on offer. What is Terna Energy Societe Anonyme Commercial Technical’s P/E ratio? Well, based on the last twelve months it is 16.31. In other words, at today’s prices, investors are paying €16.31 for every €1 in prior year profit.
See our latest analysis for Terna Energy Societe Anonyme Commercial Technical
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Terna Energy Societe Anonyme Commercial Technical:
P/E of 16.31 = €7.490 ÷ €0.459 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each €1 of company earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’.
Does Terna Energy Societe Anonyme Commercial Technical 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. If you look at the image below, you can see Terna Energy Societe Anonyme Commercial Technical has a lower P/E than the average (24.9) in the renewable energy industry classification.
ATSE:TENERGY Price Estimation Relative to Market April 7th 2020
This suggests that market participants think Terna Energy Societe Anonyme Commercial Technical will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Terna Energy Societe Anonyme Commercial Technical earnings growth of 15% in the last year. And its annual EPS growth rate over 5 years is 55%. So one might expect an above average P/E ratio.
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 Terna Energy Societe Anonyme Commercial Technical’s Debt Impact Its P/E Ratio?
Terna Energy Societe Anonyme Commercial Technical’s net debt is 91% of its market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On Terna Energy Societe Anonyme Commercial Technical’s P/E Ratio
Terna Energy Societe Anonyme Commercial Technical’s P/E is 16.3 which is above average (12.3) in its market. While the meaningful level of debt does limit its options, it has achieved solid growth over the last year. It seems the market believes growth will continue, judging by the P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.