Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Deutsche Grundstücksauktionen AG's (ETR:DGR) P/E ratio to inform your assessment of the investment opportunity. What is Deutsche Grundstücksauktionen's P/E ratio? Well, based on the last twelve months it is 15.92. That corresponds to an earnings yield of approximately 6.3%.

View our latest analysis for Deutsche Grundstücksauktionen

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Deutsche Grundstücksauktionen:

P/E of 15.92 = EUR15.10 ÷ EUR0.95 (Based on the trailing twelve months to June 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 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 Deutsche Grundstücksauktionen 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. As you can see below, Deutsche Grundstücksauktionen has a higher P/E than the average company (13.6) in the real estate industry.

Its relatively high P/E ratio indicates that Deutsche Grundstücksauktionen shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.

Deutsche Grundstücksauktionen shrunk earnings per share by 1.4% last year. But it has grown its earnings per share by 27% per year over the last five years.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

Deutsche Grundstücksauktionen's Balance Sheet

Deutsche Grundstücksauktionen has net cash of €3.3m. This is fairly high at 14% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Deutsche Grundstücksauktionen's P/E Ratio

Deutsche Grundstücksauktionen has a P/E of 15.9. That's below the average in the DE market, which is 20.8. The recent drop in earnings per share would make investors cautious, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Deutsche Grundstücksauktionen. 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.

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