Why BHB Brauholding Bayern-Mitte AG’s (FRA:B9B) High P/E Ratio Isn’t Necessarily A Bad Thing

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to BHB Brauholding Bayern-Mitte AG’s (FRA:B9B), to help you decide if the stock is worth further research. What is BHB Brauholding Bayern-Mitte’s P/E ratio? Well, based on the last twelve months it is 49.69. That corresponds to an earnings yield of approximately 2.0%.

See our latest analysis for BHB Brauholding Bayern-Mitte

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for BHB Brauholding Bayern-Mitte:

P/E of 49.69 = €3.5 ÷ €0.070 (Based on the year to June 2019.)

Is A High P/E 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.

Does BHB Brauholding Bayern-Mitte 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, BHB Brauholding Bayern-Mitte has a higher P/E than the average company (25.9) in the beverage industry.

DB:B9B Price Estimation Relative to Market, August 16th 2019
DB:B9B Price Estimation Relative to Market, August 16th 2019

That means that the market expects BHB Brauholding Bayern-Mitte will outperform other companies in its industry.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

BHB Brauholding Bayern-Mitte shrunk earnings per share by 7.9% last year. And over the longer term (5 years) earnings per share have decreased 3.6% annually. So we might expect a relatively low P/E.

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

BHB Brauholding Bayern-Mitte’s Balance Sheet

BHB Brauholding Bayern-Mitte’s net debt is 8.5% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On BHB Brauholding Bayern-Mitte’s P/E Ratio

BHB Brauholding Bayern-Mitte has a P/E of 49.7. That’s higher than the average in its market, which is 18.7. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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 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. Thank you for reading.