Is P/F Bakkafrost’s (OB:BAKKA) PE Ratio A Signal To Sell For Investors?

BAKKA’s current PE is a sizable 24.5x based on past earnings, significantly outpacing the NO Food’s average of 15.09x. But should this larger multiple be the final verdict of BAKKA’s overvaluation? No. This is because multiples like PE tend to overlook key company-specific factors such as future growth and capital structure. In this article, I am going to take you through some key things to consider in order to identify which multiple is the most relevant for BAKKA. Let’s take a look below.

How much does BAKKA earn?

PE is only used when a company is profitable, such as BAKKA. This is because the multiple is not applicable to companies that are not generating positive earnings. Other useful measures can be employed to evaluate companies in this situation, such as price-to-free-cash-flow or price-to-sales where it is suitable. BAKKA’s previous earnings record has continuously produced positive numbers. As earnings forecasts indicate the positive trend will continue, the PE multiple can be an acceptable tool to assess the BAKKA’s value, however, there may be a better option.

OB:BAKKA Future Profit July 9th 18
OB:BAKKA Future Profit July 9th 18

Is BAKKA in a lot of debt?

The business is appropriately levered which means there’s no real concern over the level of money owed. The D/E ratio shows us that the current level of debt only makes up 19.79% of the company’s equity. This is a suitable range, however, risk associated with debt obligation still exists, as with any company with debt on the books. This isn’t an alarming amount, but investors should still proceed with caution.

OB:BAKKA Historical Debt July 9th 18
OB:BAKKA Historical Debt July 9th 18
Debt levels matter when valuing the business because in theory BAKKA’s share price represents the equity portion only, but its important to account for debt, as using leverage alters the capital structure, and influences the risk and performance of the business. The EV/EBITDA multiple, which uses EV as a substitute for share price, allows us to incorporate debt into our valuation.

BAKKA’s EV/EBITDA = ø17.39b / ø0 = 16.28x

The 16.28x average multiple for the industry indicates that BAKKA may be too expensive, and whilst the price-to-earnings multiple also showed this, the EV/EBITDA suggests an even greater premium to fair value.

Does BAKKA have a fast-growing outlook?

Though upcoming growth is positive, a single-digit rate of 9.78% hardly moves the dial for a mid-cap. It’s safe to say that earnings are expected to be quite stable. Usually it would be argued to adjust multiples to be forward-looking, but due to the expected stability, using current EBITDA should suffice. In scenarios where there isn’t stability, using analyst’s forward estimate of EBITDA is recommended. For BAKKA, this results in a similar multiple of 16.28x.

Next Steps:

Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ‘s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.