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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how BE Group AB (publ)'s (STO:BEGR) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, BE Group has a P/E ratio of 7.53. That corresponds to an earnings yield of approximately 13%.
View our latest analysis for BE Group
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 BE Group:
P/E of 7.53 = SEK46.4 ÷ SEK6.16 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each SEK1 of company earnings. 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, BE Group grew EPS like Taylor Swift grew her fan base back in 2010; the 233% gain was both fast and well deserved.
How Does BE Group's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that BE Group has a lower P/E than the average (14.9) P/E for companies in the trade distributors industry.
This suggests that market participants think BE Group will underperform other companies in its 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.
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. That means it doesn't take debt or cash into account. 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.
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.
Is Debt Impacting BE Group's P/E?
Net debt totals 73% of BE Group's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.