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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how bpost SA/NV's (EBR:BPOST) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, bpost has a P/E ratio of 7.64. That means that at current prices, buyers pay €7.64 for every €1 in trailing yearly profits.
See our latest analysis for bpost
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for bpost:
P/E of 7.64 = €9.36 ÷ €1.22 (Based on the trailing twelve months to June 2019.)
Is A High P/E 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.
How Does bpost's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that bpost has a lower P/E than the average (15.1) P/E for companies in the logistics industry.
bpost's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with bpost, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
bpost saw earnings per share decrease by 6.8% last year. And over the longer term (5 years) earnings per share have decreased 3.7% annually. So you wouldn't expect a very high P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.