This servco home and appliancearticle 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 Ameren Corporation’s (

NYSE:AEE

) P/E ratio could help you assess the value on offer.

Ameren has a price to earnings ratio of 23

, based on the last twelve months. That corresponds to an earnings yield of approximately 4.3%.

See our latest analysis for Ameren

How Do I Calculate Ameren’s Price To Earnings Ratio?

The

formula for P/E

is:

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

Or for Ameren:

P/E of 23 = $64.94 ÷ $2.82 (Based on the trailing twelve months to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay

a higher price

for each $1 the company has earned over the last year. 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.’

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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.

Ameren increased earnings per share by an impressive 11% over the last twelve months. And it has bolstered its earnings per share by 3.5% per year over the last five years. With that performance, you might expect an above average P/E ratio.

How Does Ameren’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (16.5) for companies in the integrated utilities industry is lower than Ameren’s P/E.

NYSE:AEE PE PEG Gauge January 2nd 19

Its relatively high P/E ratio indicates that Ameren 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 further research is always essential. I often monitor

director buying and selling

.

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

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

How Does Ameren’s Debt Impact Its P/E Ratio?

Ameren’s net debt is 55% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Bottom Line On Ameren’s P/E Ratio

Ameren has a P/E of 23. That’s higher than the average in the US market, which is 16. While the meaningful level of debt does limit its options, it has achieved solid growth over the last year. The relatively high P/E ratio suggests shareholders think growth will continue.

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. So this

free

visual report on analyst forecasts

could hold they key to an excellent investment decision.

Of course

you might be able to find a better stock than Ameren

. So you may wish to see this

free

collection of other companies that have grown earnings strongly.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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