In This Article:
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 BIOREM Inc.'s (CVE:BRM) P/E ratio could help you assess the value on offer. What is BIOREM's P/E ratio? Well, based on the last twelve months it is 2.88. That corresponds to an earnings yield of approximately 35%.
Check out our latest analysis for BIOREM
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for BIOREM:
P/E of 2.88 = CA$0.35 ÷ CA$0.12 (Based on the year 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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Does BIOREM's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that BIOREM has a lower P/E than the average (11.1) P/E for companies in the commercial services industry.
BIOREM'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 BIOREM, 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, BIOREM grew EPS like Taylor Swift grew her fan base back in 2010; the 176% gain was both fast and well deserved. Even better, EPS is up 37% per year over three years. So you might say it really deserves to have an above-average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.