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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt.’s (BUSE:BIF) P/E ratio could help you assess the value on offer. Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt has a price to earnings ratio of 7.92, based on the last twelve months. That is equivalent to an earnings yield of about 13%.
How Do You Calculate Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt:
P/E of 7.92 = HUF298 ÷ HUF37.63 (Based on the trailing twelve months to December 2018.)
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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
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. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt shrunk earnings per share by 30% over the last year. But EPS is up 80% over the last 5 years.
How Does Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt has a lower P/E than the average (11.2) P/E for companies in the real estate industry.
Its relatively low P/E ratio indicates that Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. So it won’t reflect the advantage of cash, or disadvantage of debt. 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).
So What Does Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s Balance Sheet Tell Us?
Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s net debt is 0.09% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s P/E Ratio
Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt trades on a P/E ratio of 7.9, which is below the HU market average of 11.7. With only modest debt, it’s likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
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.’ Although we don’t have analyst forecasts, shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.