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. Mortgage Advice Bureau (Holdings) has a price to earnings ratio of 21.77, based on the last twelve months. That means that at current prices, buyers pay £21.77 for every £1 in trailing yearly profits.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Mortgage Advice Bureau (Holdings):
P/E of 21.77 = £5.42 ÷ £0.25 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each £1 the company has earned over the last year. 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
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Mortgage Advice Bureau (Holdings)’s earnings per share fell by 9.7% in the last twelve months. But EPS is up 30% over the last 5 years.
How Does Mortgage Advice Bureau (Holdings)’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Mortgage Advice Bureau (Holdings) has a significantly higher P/E than the average (7.2) P/E for companies in the mortgage industry.
Mortgage Advice Bureau (Holdings)’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Mortgage Advice Bureau (Holdings)’s Balance Sheet
Mortgage Advice Bureau (Holdings) has net cash of UK£23m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Mortgage Advice Bureau (Holdings)’s P/E Ratio
Mortgage Advice Bureau (Holdings) trades on a P/E ratio of 21.8, which is above the GB market average of 15.6. The recent drop in earnings per share would make some investors cautious, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!
Investors should be looking to buy stocks that the market is wrong about. 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.’ So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.