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 BFW Liegenschaften AG's (VTX:BLIN) P/E ratio to inform your assessment of the investment opportunity. BFW Liegenschaften has a P/E ratio of 17.18, based on the last twelve months. That corresponds to an earnings yield of approximately 5.8%.
Check out our latest analysis for BFW Liegenschaften
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for BFW Liegenschaften:
P/E of 17.18 = CHF43.50 ÷ CHF2.53 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CHF1 the company has earned over the last year. 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 BFW Liegenschaften Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, BFW Liegenschaften has a higher P/E than the average company (15.7) in the real estate industry.
That means that the market expects BFW Liegenschaften will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
BFW Liegenschaften saw earnings per share decrease by 35% last year. But over the longer term (5 years) earnings per share have increased by 2.6%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.