The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Bijou Brigitte modische Accessoires Aktiengesellschaft's (ETR:BIJ), to help you decide if the stock is worth further research. Based on the last twelve months, Bijou Brigitte modische Accessoires's P/E ratio is 14. In other words, at today's prices, investors are paying €14 for every €1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Bijou Brigitte modische Accessoires:
P/E of 14 = €38.2 ÷ €2.73 (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. 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.'
Does Bijou Brigitte modische Accessoires Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (20.1) for companies in the luxury industry is higher than Bijou Brigitte modische Accessoires's P/E.
Its relatively low P/E ratio indicates that Bijou Brigitte modische Accessoires shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Bijou Brigitte modische Accessoires, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Bijou Brigitte modische Accessoires's earnings per share were pretty steady over the last year. And EPS is down 4.9% a year, over the last 5 years. So you wouldn't expect a very high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Bijou Brigitte modische Accessoires's Debt Impact Its P/E Ratio?
With net cash of €117m, Bijou Brigitte modische Accessoires has a very strong balance sheet, which may be important for its business. Having said that, at 39% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Bijou Brigitte modische Accessoires's P/E Ratio
Bijou Brigitte modische Accessoires has a P/E of 14. That's below the average in the DE market, which is 19.7. Earnings improved over the last year. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don't think it will.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Bijou Brigitte modische Accessoires. So you may wish to see this free collection of other companies that have grown earnings strongly.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.