Yahoo Finance Is Fundamenta Real Estate AG's (VTX:FREN) P/E Ratio Really That Good?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Fundamenta Real Estate AG's (VTX:FREN) P/E ratio to inform your assessment of the investment opportunity. What is Fundamenta Real Estate's P/E ratio? Well, based on the last twelve months it is 12.96. In other words, at today's prices, investors are paying CHF12.96 for every CHF1 in prior year profit.
Check out our latest analysis for Fundamenta Real Estate
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Fundamenta Real Estate:
P/E of 12.96 = CHF15.35 ÷ CHF1.18 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 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.
How Does Fundamenta Real Estate's P/E Ratio Compare To Its Peers?
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 Fundamenta Real Estate has a lower P/E than the average (16.3) in the real estate industry classification.
Its relatively low P/E ratio indicates that Fundamenta Real Estate shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Notably, Fundamenta Real Estate grew EPS by a whopping 49% in the last year. And its annual EPS growth rate over 5 years is 16%. So we'd generally expect it to have a relatively high 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. That means it doesn't take debt or cash into account. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Fundamenta Real Estate's Balance Sheet
Fundamenta Real Estate's net debt is considerable, at 110% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Fundamenta Real Estate's P/E Ratio
Fundamenta Real Estate's P/E is 13.0 which is below average (20.1) in the CH market. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. 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: Fundamenta Real Estate 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.
