Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Bellevue Group AG's (VTX:BBN) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Bellevue Group has a P/E ratio of 13.60. That is equivalent to an earnings yield of about 7.4%.
Check out our latest analysis for Bellevue Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bellevue Group:
P/E of 13.60 = CHF23.00 ÷ CHF1.69 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each CHF1 of company 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 Bellevue Group's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (14.9) for companies in the capital markets industry is higher than Bellevue Group's P/E.
This suggests that market participants think Bellevue Group will underperform other companies in its industry. Since the market seems unimpressed with Bellevue Group, it's quite possible it could surprise on the upside. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Bellevue Group's earnings per share fell by 2.3% in the last twelve months. But EPS is up 21% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.