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 Buzzi Unicem SpA’s (BIT:BZU) P/E ratio could help you assess the value on offer. Based on the last twelve months, Buzzi Unicem’s P/E ratio is 8.72. In other words, at today’s prices, investors are paying €8.72 for every €1 in prior year profit.
View our latest analysis for Buzzi Unicem
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 Buzzi Unicem:
P/E of 8.72 = €16.81 ÷ €1.93 (Based on the trailing twelve months to June 2018.)
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. 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 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. 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.
It’s nice to see that Buzzi Unicem grew EPS by a stonking 129% in the last year. And earnings per share have improved by 45% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Buzzi Unicem’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 Buzzi Unicem has a lower P/E than the average (11.4) P/E for companies in the basic materials industry.
This suggests that market participants think Buzzi Unicem will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.