Here's What Payton Planar Magnetics Ltd.'s (EBR:PAY) P/E Ratio Is Telling Us

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Payton Planar Magnetics Ltd.'s (EBR:PAY), to help you decide if the stock is worth further research. Payton Planar Magnetics has a P/E ratio of 12.50, based on the last twelve months. In other words, at today's prices, investors are paying €12.50 for every €1 in prior year profit.

See our latest analysis for Payton Planar Magnetics

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Payton Planar Magnetics:

P/E of 12.50 = USD7.21 (Note: this is the share price in the reporting currency, namely, USD ) ÷ USD0.58 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Payton Planar Magnetics Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Payton Planar Magnetics has a lower P/E than the average (20.9) P/E for companies in the electronic industry.

This suggests that market participants think Payton Planar Magnetics will underperform other companies in its industry. Since the market seems unimpressed with Payton Planar Magnetics, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Payton Planar Magnetics increased earnings per share by an impressive 16% over the last twelve months. And earnings per share have improved by 53% annually, over the last five years. So one might expect an above average P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. 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.

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).

So What Does Payton Planar Magnetics's Balance Sheet Tell Us?

With net cash of US$30m, Payton Planar Magnetics has a very strong balance sheet, which may be important for its business. Having said that, at 23% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Payton Planar Magnetics's P/E Ratio

Payton Planar Magnetics has a P/E of 12.5. That's below the average in the BE market, which is 17.1. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.

But note: Payton Planar Magnetics 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).

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.