The5w30 or 10w30 for winter goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Cembra Money Bank AG's (

VTX:CMBN

), to help you decide if the stock is worth further research.

Cembra Money Bank has a P/E ratio of 19.27

, based on the last twelve months. That means that at current prices, buyers pay CHF19.27 for every CHF1 in trailing yearly profits.

View our latest analysis for Cembra Money Bank

How Do You Calculate A P/E Ratio?

The

formula for price to earnings

is:

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

Or for Cembra Money Bank:

P/E of 19.27 = CHF106.00 ÷ CHF5.50 (Based on the year to June 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. 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 Cembra Money Bank Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Cembra Money Bank has a higher P/E than the average (11.4) P/E for companies in the consumer finance industry.

SWX:CMBN Price Estimation Relative to Market, January 1st 2020

Its relatively high P/E ratio indicates that Cembra Money Bank shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check

if company insiders have been buying or selling

.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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.

Cembra Money Bank's earnings per share were pretty steady over the last year. But over the longer term (5 years) earnings per share have increased by 8.5%.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

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.

Story continues

Is Debt Impacting Cembra Money Bank's P/E?

Cembra Money Bank's net debt equates to 36% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Cembra Money Bank's P/E Ratio

Cembra Money Bank's P/E is 19.3 which is about average (20.1) in the CH market. With modest debt and some recent earnings growth, it seems likely the market expects a steady performance going forward.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.

If you spot an error that warrants correction, please contact the editor at

[email protected]

. 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.

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