Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at Bureau Veritas SA’s (EPA:BVI) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Bureau Veritas has a P/E ratio of 28.51. That means that at current prices, buyers pay €28.51 for every €1 in trailing yearly profits.
How Do You Calculate Bureau Veritas’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bureau Veritas:
P/E of 28.51 = €23.11 ÷ €0.81 (Based on the trailing twelve months 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. 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 Does Bureau Veritas’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. The image below shows that Bureau Veritas has a higher P/E than the average (16.2) P/E for companies in the professional services industry.
That means that the market expects Bureau Veritas will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. Earnings growth means that in the future the ‘E’ will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Bureau Veritas increased earnings per share by 7.0% last year. And it has bolstered its earnings per share by 1.5% per year over the last five years.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. 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).
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 Bureau Veritas’s Debt Impact Its P/E Ratio?
Bureau Veritas has net debt worth 20% of its market capitalization. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.
The Verdict On Bureau Veritas’s P/E Ratio
Bureau Veritas has a P/E of 28.5. That’s higher than the average in its market, which is 17.8. With debt at prudent levels and improving earnings, it’s fair to say the market expects steady progress in the future.
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 the key to an excellent investment decision.
Of course you might be able to find a better stock than Bureau Veritas. 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 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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