This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use B2Holding ASA’s (OB:B2H) P/E ratio to inform your assessment of the investment opportunity. B2Holding has a P/E ratio of 8.84, based on the last twelve months. That is equivalent to an earnings yield of about 11%.
See our latest analysis for B2Holding
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for B2Holding:
P/E of 8.84 = NOK14.14 ÷ NOK1.6 (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 NOK1 the company has earned over the last year. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
It’s nice to see that B2Holding grew EPS by a stonking 77% in the last year. And its annual EPS growth rate over 5 years is 38%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does B2Holding’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (9.7) for companies in the consumer finance industry is higher than B2Holding’s P/E.
B2Holding’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. 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.
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).
Is Debt Impacting B2Holding’s P/E?
B2Holding’s net debt is considerable, at 138% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.