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 Beiersdorf Aktiengesellschaft’s (ETR:BEI) P/E ratio could help you assess the value on offer. Based on the last twelve months, Beiersdorf’s P/E ratio is 30.9. That is equivalent to an earnings yield of about 3.2%.
How Do I Calculate Beiersdorf’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Beiersdorf:
P/E of 30.9 = €93.06 ÷ €3.01 (Based on the year to June 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each €1 the company has earned over the last year. 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 even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Beiersdorf saw earnings per share decrease by 6.6% last year. But EPS is up 7.6% over the last 5 years.
How Does Beiersdorf’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Beiersdorf has a higher P/E than the average (20.7) P/E for companies in the personal products industry.
Its relatively high P/E ratio indicates that Beiersdorf shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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).
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.
Is Debt Impacting Beiersdorf’s P/E?
The extra options and safety that comes with Beiersdorf’s €1.8b 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 Beiersdorf’s P/E Ratio
Beiersdorf’s P/E is 30.9 which is above average (16.6) in the DE market. Falling earnings per share is probably keeping traditional value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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.
But note: Beiersdorf may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.