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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Fine Foods & Pharmaceuticals N.T.M. S.p.A.'s (BIT:FF), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Fine Foods & Pharmaceuticals N.T.M has a P/E ratio of 20. That corresponds to an earnings yield of approximately 5.0%.
See our latest analysis for Fine Foods & Pharmaceuticals N.T.M
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 Fine Foods & Pharmaceuticals N.T.M:
P/E of 20 = €10.2 ÷ €0.51 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Fine Foods & Pharmaceuticals N.T.M 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. If you look at the image below, you can see Fine Foods & Pharmaceuticals N.T.M has a lower P/E than the average (41) in the life sciences industry classification.
Its relatively low P/E ratio indicates that Fine Foods & Pharmaceuticals N.T.M shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Fine Foods & Pharmaceuticals N.T.M grew EPS like Taylor Swift grew her fan base back in 2010; the 120% gain was both fast and well deserved.
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. That means it doesn't take debt or cash into account. 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).