Don't Sell Salvatore Ferragamo S.p.A. (BIT:SFER) Before You Read This

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Salvatore Ferragamo S.p.A.'s (BIT:SFER) P/E ratio to inform your assessment of the investment opportunity. What is Salvatore Ferragamo's P/E ratio? Well, based on the last twelve months it is 35.51. In other words, at today's prices, investors are paying €35.51 for every €1 in prior year profit.

Check out our latest analysis for Salvatore Ferragamo

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 Salvatore Ferragamo:

P/E of 35.51 = €17.70 ÷ €0.50 (Based on the trailing twelve months to September 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. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Salvatore Ferragamo Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (17.9) for companies in the luxury industry is lower than Salvatore Ferragamo's P/E.

Salvatore Ferragamo's P/E tells us that market participants think the company will perform better than its industry peers, going forward.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Salvatore Ferragamo saw earnings per share decrease by 16% last year. And EPS is down 11% a year, over the last 5 years. This could justify a pessimistic P/E. So if Salvatore Ferragamo grows EPS going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

Is Debt Impacting Salvatore Ferragamo's P/E?

The extra options and safety that comes with Salvatore Ferragamo's €150m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Salvatore Ferragamo's P/E Ratio

Salvatore Ferragamo has a P/E of 35.5. That's higher than the average in its market, which is 18.1. The recent drop in earnings per share might keep value investors away, 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. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.

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.

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.

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. Thank you for reading.