Despite Its High P/E Ratio, Is Neinor Homes, S.A. (BME:HOME) Still Undervalued?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Neinor Homes, S.A.'s (BME:HOME) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Neinor Homes has a P/E ratio of 8.61. That is equivalent to an earnings yield of about 11.6%.
View our latest analysis for Neinor Homes
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 Neinor Homes:
P/E of 8.61 = €7.220 ÷ €0.838 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does Neinor Homes's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Neinor Homes has a P/E ratio that is roughly in line with the consumer durables industry average (8.7).
That indicates that the market expects Neinor Homes will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
It's nice to see that Neinor Homes grew EPS by a stonking 42% in the last year. And earnings per share have improved by 308% annually, over the last three years. So we'd generally expect it to have a relatively high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
Is Debt Impacting Neinor Homes's P/E?
Neinor Homes has net debt equal to 36% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Neinor Homes's P/E Ratio
Neinor Homes's P/E is 8.6 which is below average (14.0) in the ES market. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Neinor Homes. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.
