This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Mortgage Advice Bureau (Holdings) plc’s (LON:MAB1) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Mortgage Advice Bureau (Holdings) has a P/E ratio of 29.21. In other words, at today’s prices, investors are paying £29.21 for every £1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Mortgage Advice Bureau (Holdings):
P/E of 29.21 = £7.60 ÷ £0.26 (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 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 Does Mortgage Advice Bureau (Holdings)’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Mortgage Advice Bureau (Holdings) has a much higher P/E than the average company (9.6) in the mortgage industry.
Its relatively high P/E ratio indicates that Mortgage Advice Bureau (Holdings) 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Mortgage Advice Bureau (Holdings)’s earnings per share grew by -4.5% in the last twelve months. And it has bolstered its earnings per share by 28% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Mortgage Advice Bureau (Holdings)’s Debt Impact Its P/E Ratio?
Since Mortgage Advice Bureau (Holdings) holds net cash of UK£24m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Mortgage Advice Bureau (Holdings)’s P/E Ratio
Mortgage Advice Bureau (Holdings)’s P/E is 29.2 which is above average (18.3) in its market. Recent earnings growth wasn’t bad. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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.
You might be able to find a better buy than Mortgage Advice Bureau (Holdings). 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).
If you spot an error that warrants correction, please contact the editor at email@example.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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