Should We Worry About Bioventix PLC’s (LON:BVXP) P/E Ratio?

Lee Kay

Mon, Feb 18, 2019, 12:32 AM

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 Bioventix PLC’s (LON:BVXP) P/E ratio could help you assess the value on offer. Based on the last twelve months, Bioventix’s P/E ratio is 31.62. In other words, at today’s prices, investors are paying £31.62 for every £1 in prior year profit.

See our latest analysis for Bioventix

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Bioventix:

P/E of 31.62 = £34.85 ÷ £1.1 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each £1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It’s great to see that Bioventix grew EPS by 14% in the last year. And earnings per share have improved by 28% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

How Does Bioventix’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Bioventix has a higher P/E than the average company (21.5) in the biotechs industry.

Its relatively high P/E ratio indicates that Bioventix shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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.