The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Bremer Lagerhaus Gesellschaft Aktiengesellschaft von 1877’s (FRA:BLH) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Bremer Lagerhaus Gesellschaft von 1877’s P/E ratio is 20.45. That is equivalent to an earnings yield of about 4.9%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bremer Lagerhaus Gesellschaft von 1877:
P/E of 20.45 = €13.5 ÷ €0.66 (Based on the trailing twelve months to December 2018.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Bremer Lagerhaus Gesellschaft von 1877 saw earnings per share improve by -9.5% last year. And earnings per share have improved by 2.4% annually, over the last five years.
Does Bremer Lagerhaus Gesellschaft von 1877 Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below Bremer Lagerhaus Gesellschaft von 1877 has a P/E ratio that is fairly close for the average for the infrastructure industry, which is 21.3.
Bremer Lagerhaus Gesellschaft von 1877’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Bremer Lagerhaus Gesellschaft von 1877 actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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).
Bremer Lagerhaus Gesellschaft von 1877’s Balance Sheet
Net debt totals a substantial 141% of Bremer Lagerhaus Gesellschaft von 1877’s market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Bremer Lagerhaus Gesellschaft von 1877’s P/E Ratio
Bremer Lagerhaus Gesellschaft von 1877 has a P/E of 20.5. That’s around the same as the average in the DE market, which is 20.1. It has significant debt, though the market seems to take confidence from recent earnings growth.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Bremer Lagerhaus Gesellschaft von 1877 may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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 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. Thank you for reading.