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Is boohoo group plc’s (LON:BOO) High P/E Ratio A Problem For Investors?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at boohoo group plc’s (LON:BOO) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, boohoo group’s P/E ratio is 60.46. That is equivalent to an earnings yield of about 1.7%.

See our latest analysis for boohoo 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 boohoo group:

P/E of 60.46 = £1.78 ÷ £0.029 (Based on the trailing twelve months to August 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each £1 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 Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

Most would be impressed by boohoo group earnings growth of 22% in the last year. And its annual EPS growth rate over 5 years is 36%. This could arguably justify a relatively high P/E ratio.

How Does boohoo group’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, boohoo group has a higher P/E than the average company (24.4) in the online retail industry.

AIM:BOO Price Estimation Relative to Market, March 14th 2019

Its relatively high P/E ratio indicates that boohoo group 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does boohoo group’s Debt Impact Its P/E Ratio?

The extra options and safety that comes with boohoo group’s UK£156m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On boohoo group’s P/E Ratio

boohoo group’s P/E is 60.5 which is way above average (15.7) in the GB market. With cash in the bank the company has plenty of growth options — and it is already on the right track. Therefore it seems reasonable that the market would have relatively high expectations of the company

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than boohoo group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.