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Read This Before You Buy Edisun Power Europe AG (VTX:ESUN) Because Of Its P/E Ratio

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Edisun Power Europe AG's (VTX:ESUN) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Edisun Power Europe's P/E ratio is 17.79. That is equivalent to an earnings yield of about 5.6%.

View our latest analysis for Edisun Power Europe

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Edisun Power Europe:

P/E of 17.79 = CHF106.000 ÷ CHF5.960 (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 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 Edisun Power Europe's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (23.4) for companies in the renewable energy industry is higher than Edisun Power Europe's P/E.

SWX:ESUN Price Estimation Relative to Market March 30th 2020
SWX:ESUN Price Estimation Relative to Market March 30th 2020

Edisun Power Europe'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 Edisun Power Europe, it's quite possible it could surprise on the upside. 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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Edisun Power Europe had pretty flat EPS growth in the last year. But EPS is up 38% over the last 5 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 Edisun Power Europe's P/E?

Net debt totals 51% of Edisun Power Europe's 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 Bottom Line On Edisun Power Europe's P/E Ratio

Edisun Power Europe's P/E is 17.8 which is about average (16.8) in the CH market. While it does have considerable debt, the market seems to be reassured by recent growth in earnings per share.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Edisun Power Europe. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.