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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how DEMIRE Deutsche Mittelstand Real Estate AG's (ETR:DMRE) P/E ratio could help you assess the value on offer. DEMIRE Deutsche Mittelstand Real Estate has a price to earnings ratio of 8.43, based on the last twelve months. That is equivalent to an earnings yield of about 12%.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for DEMIRE Deutsche Mittelstand Real Estate:
P/E of 8.43 = €4.85 ÷ €0.58 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
DEMIRE Deutsche Mittelstand Real Estate saw earnings per share decrease by 1.9% last year. And over the longer term (3 years) earnings per share have decreased 14% annually. So we might expect a relatively low P/E.
Does DEMIRE Deutsche Mittelstand Real Estate Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see DEMIRE Deutsche Mittelstand Real Estate has a lower P/E than the average (15.2) in the real estate industry classification.
Its relatively low P/E ratio indicates that DEMIRE Deutsche Mittelstand 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
Is Debt Impacting DEMIRE Deutsche Mittelstand Real Estate's P/E?
DEMIRE Deutsche Mittelstand Real Estate has net debt worth 85% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On DEMIRE Deutsche Mittelstand Real Estate's P/E Ratio
DEMIRE Deutsche Mittelstand Real Estate trades on a P/E ratio of 8.4, which is below the DE market average of 20. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
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.