Here's What PostNL N.V.'s (AMS:PNL) P/E Ratio Is Telling Us
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at PostNL N.V.'s (AMS:PNL) P/E ratio and reflect on what it tells us about the company's share price. PostNL has a price to earnings ratio of 9.87, based on the last twelve months. That means that at current prices, buyers pay €9.87 for every €1 in trailing yearly profits.
Check out our latest analysis for PostNL
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 PostNL:
P/E of 9.87 = EUR1.47 ÷ EUR0.15 (Based on the trailing twelve months to December 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 PostNL 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 PostNL has a lower P/E than the average (14.7) in the logistics industry classification.
PostNL's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with PostNL, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
PostNL shrunk earnings per share by 46% over the last year. And EPS is down 22% a year, over the last 5 years. This could justify a pessimistic P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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.
Is Debt Impacting PostNL's P/E?
Net debt is 30% of PostNL's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On PostNL's P/E Ratio
PostNL's P/E is 9.9 which is below average (18.8) in the NL market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
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.
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.
